U.S. fuel oil and diesel stocks decline as demand rises By Reuters

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© Reuters. FILE PHOTO: Snowfall blankets the city during a winter storm in Miamisburg, Ohio, U.S., January 17, 2022. REUTERS/Megan Jelinger/File Photo

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By Laura Sanicola

(Reuters) – U.S. supplies of fuels such as diesel and have dwindled and refiners are struggling to replenish that supply, which could keep prices high for months.

Demand for diesel, heating oil and other products has been above pre-pandemic levels for months. However, production has not kept up as some refineries have closed since the start of the coronavirus pandemic while others have postponed maintenance.

On Thursday, heating oil futures were priced at $2.83, the highest price in seven years.

Rising fuel costs could become a recurring feature of energy markets as companies find it harder to react to supply shortage situations.

Fuel availability is already being tested by freezing temperatures across much of the United States and is expected to persist for days. This has spurred demand for power generation, and some utilities on the path to cold weather are gearing up to use more distilled fuel oil to meet demand.

U.S. demand for distillates in 2021 was about 5% above pre-pandemic levels, putting inventories 15% below the five-year rolling average https://graphics.reuters.com/ USA-DISTILLATE/lgpdwxordvo, according to US Energy Information Administration data. U.S. East Coast stocks are at their lowest since April 2020.

When stocks are low, refiners generally respond by increasing production. However, global refining capacity has shrunk by more than 2 million barrels a day during the pandemic, while US refining capacity last year fell 4.5% to 18.1 million barrels. per day (bpd), according to federal data.

U.S. refiners are still operating plants at rates below the five-year average to avoid producing too much jet fuel, where demand still lags behind 2019 levels.

“In fact, we don’t see a clear path in the near future to being able to replenish diesel inventory,” Valero chief commercial officer Gary Simmons said during the company’s earnings call last week.

The national average diesel price was recently $3.78 per gallon, the highest since September 2014. In places like New England, oil-fired generation is expected to temporarily increase in the coming days, which could further increase fuel prices. price.

Prices are expected to decline as winter subsidies and heating oil demand decline, allowing inventories to rebuild, according to Troy Vincent, senior market analyst at DTN Markets. But if the cost of products used to make distillates remains high, fuel prices could remain high.

“There’s this unique dynamic this winter that has contributed to inventory pressure, so it’s hard to know what the fuel market will look like in the spring,” Vincent said.

REVERSE

Expectations for thin distillate inventories have pushed the heating oil market into backwardation, a market term for a situation where current prices are higher than expected future prices.

Several traders with lucrative long-term diesel storage contracts are choosing not to renew them because there is no financial incentive to store diesel, traders said.

Traders make money from May to February, paying to store distilled fuels in exchange for selling them when they are worth more in the future. But the current high price makes it a less appealing game.

In Europe, record natural gas prices have led European refiners to cut production to save on these costs. That tightened stocks there, widening European diesel’s six-month spread to its widest run since March 2008 last week. With strong demand, US distillate exports to Europe have strengthened accordingly.

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