Factors that will determine U.S. diesel price averages this year include the fallout from IMO 2020 regulations, the PES Refinery shutdown and agricultural demand.
Here’s our region-by-region breakdown of U.S. spot diesel prices east of the Rocky Mountains – the Gulf Coast, Northeast and Midwest – independent from market shifts motivated by the coronavirus outbreak.
Remember, the price you pay for diesel at the wholesale level starts in the futures market, where paper contracts are traded. You can read more about diesel price futures here.
Diesel produced in a refinery is priced at a premium or discount to the futures market. That so-called “spot price” is then used to derive the value wholesalers pay at one of some 400 rack markets across the United States.
Let's start with the Gulf Coast spot diesel market...
Gulf Coast Diesel Prices Will be Influenced by IMO 2020 Regulations
As the calendar rolled forward to 2020, all eyes were on the new IMO regulations and the potential ramifications they might have on Gulf Coast diesel prices.
First-quarter 2020 diesel prices look to challenge some of the 2019 highs thanks to the IMO 2020 impact. Refiners, traders and other supply-chain participants may be biased to protect inventory rather than selling incremental barrels until diesel demand requirements are sorted out.
The new IMO 2020 regulations will cause refiners to seek out lower sulfur and lighter crudes to process fuel to help their production get closer to meeting the new sulfur limits on marine and bunker fuels. However, a lot remains up in the air about what the new regulation will mean for the Gulf Coast distillate market.
The U.S. Energy Information Administration (EIA) stated that it expects IMO 2020 regulations will encourage global refiners to increase refinery runs and maximize upgrading of high-sulfur heavy fuel oils into low-sulfur distillate fuel to create compliant bunker fuels.
EIA also forecast that U.S. refinery runs will rise by 3% year over year, to a record 17.5 million b/d in 2020, resulting in refinery utilization rates that average 93% in 2020.
Recent EIA data showed Gulf Coast distillate stockpiles at 38.768 million bbl, which, at the time, was the lowest inventories had been since August. Still, stocks were ahead of year-ago levels, but trailed the five-year average of 40.431 million bbl.
Gulf Coast distillate traders will also keep a close eye on New York Harbor supplies, which are well below five-year averages.
Northeast Heating Oil Market Impacted by PES Refinery Closure
During 2019, the U.S. Northeast spot diesel market saw a dramatic shift, when, on June 21, the 350,000-b/d Philadelphia Energy Solutions (PES) refining complex experienced a series of explosions, followed by a massive fire, which ultimately led to the closure of the facility.
Of all the Northeast distillates, low-sulfur heating oil 500-ppm seems to have been the most impacted by the closure of PES. According to stakeholders in the market, PES was a key supplier of LSHO 500-ppm in the region.
LSHO 500-ppm basis differentials have strengthened in recent years, as regional stocks have declined. In 2017, the average trade discount for Buckeye barrels was 9cts/gal beneath front-month ULSD futures. In 2018, that discount tightened to minus 4.85cts/gal to ULSD futures, while – as of mid-December – 2019 saw an average of 3.55cts/gal beneath the screen.
At the same time, EIA data shows stocks of distillate fuel oil between 15-500 ppm tightened, with 2017 averaging 4.7 million bbl, 2018 averaging 2.5 million bbl, and 2019 averaging 1.6 million bbl.
The impact of PES' closure on stocks can be seen, as stockpiles were running around 1.9 million bbl on average prior to the incident in 2019, while after the incident, supplies averaged 1.4 million bbl.
The tighter supplies seen in recent years may have been a reaction to the shifting regulatory landscape in the Northeast, when as of July 1, 2018, Massachusetts, Rhode Island, Vermont, Connecticut, Maine, New Hampshire and the District of Columbia began requiring the use of ultra-low-sulfur heating oil (ULSHO), with no more than 15-ppm sulfur.
According to market participants, LSHO 500-ppm was already becoming harder to find following the shift in regulations, and with the loss of PES barrels, those LSHO 500-ppm barrels have become tighter in the spot market – particularly on Laurel Pipeline.
While ULSHO with its 15-ppm specification should meet the needs of those who would normally use LSHO 500-ppm, in some cases buyers can only take LSHO 500-ppm in their tanks. With this, ULSHO and LSHO 500-ppm differentials have been running close together, with LSHO 500-ppm values even popping above ULSHO values occasionally.
ULSD futures suggest a general downward trend for Northeast distillates after the first few months of 2020, following the initial IMO 2020 transition, and as the region comes out of the high-demand winter months.
Midwest Diesel Prices Could See Persistent Pressure
Diesel production should remain strong in 2020 based on the refining economics, sources said.
"Midcon cash cracks favor ULSD production, and Midcon refiners have access to discounted heavy crude," a trader said.
Those economics should maintain diesel output even though it will likely mean sustained pressure on ULSD basis levels for the year, the source added.
"The crack spreads on diesel have been good enough to keep refiners going," a trader said, adding that discounts of 2-3cts at the racks would still allow for profitable operations by refiners.
The state of the diesel market will be closely watched after a difficult year in the Chicago and Group 3 markets with key agricultural demand hampered, sources said.
Diesel demand year on year will be a focal point after wet conditions slowed or prevented planting in several areas in the region in 2019, a source said. It remains too early to forecast agricultural demand, but market participants will be watching closely in the spring, sources said.
"It was a rough year in 2019 for Group 3 and Chicago in diesel, and we will not really know for 2020 until March planting season," a trader said.
Diesel inventories levels have been strong with high production levels, and the amount of product in tanks and the amount of storage capacity have limited volatility, sources said.
The refinery capacity and utilization rates and storage levels will limit opportunities for market players to bring in barrels from the Gulf Coast, a trader said, calling it a battle for non-refiners to find opportunities to benefit.
Distillates stocks in the Midwest totaled 26.7 million bbl for the week ended Dec. 13, 2019, down from 31.7 million bbl at the end of 2018, EIA data showed.
Distillates inventories averaged 32 million bbl in 2019, rising above the average of 30.9 million bbl for 2018, EIA data showed.
The expansions in Group 3 ULSD (X-grade) storage capacity on the Magellan system have provided a buffer that can withstand a harvest season that produces either spikes or drops in demand, a trader said. The amount of product in storage reduces opportunity in the market, the source added.
"It seems to be becoming a worse and worse market," a trader said of Midwest diesel. "Higher runs make for less volatility. There's always more product around, it seems."
The production and storage levels have reduced volatility in the Group 3 market and tightened spreads between the Group and other markets, a source said.
Inventories of ULSD on the Magellan system came to about 5.5 million bbl at the end of the year, with stocks following seasonal trends after pushing to six-year highs around 8.5 million bbl in July and August, according to a market source.
"We will start the year with more than 6 million bbl of X-grade and may get into 7 million bbl in March," a trader said. "There are so many barrels in inventory that it's hard to make money off of them."
Get more trends for U.S. diesel prices in the newly released 2020 OPIS Oil Market Outlook.