Record low gasoil inventories in the US sustain high cracks and retail prices
The United States Energy Information Administration (EIA) publishes weekly inventory data for crude and petroleum products going back to August 1982, and at no point in the last 40 years have end-October “Distillate Fuel Oil” (gasoil) stocks been lower than they are today.
Throughout the summer, stocks have been low and have struggled to build despite it being a period of reduced demand. Some 106 Mb are in storage, just above May’s low of 104 Mb, which in itself was a 17-year low, as the country heads into peak winter demand season with limited prospects for a significant build before temperatures fall further.
At the same time, weekly product supplied, a rough proxy for demand figures, has fallen to 3,878 kbd in the week ending October 21st, down from 4,370 kbd on October 7th. A figure around 4,000 kbd, however, is very much in line with recent-year averages. Across the country, on-highway diesel prices currently average $5.34/gal, $1.63/gal higher than a year ago, but from the implied figures, there is no sign that demand has been significantly dampened. Diesel constitutes around 90% of gasoil consumed in the US. The Nymex ULSD crack spread is a stark reflection of the current high-demand / low inventory environment.
Having reached a peak of $86.12/bbl on October 16th, the front-month crack has declined to around $67/bbl, but is still massively above the typical range seen in recent years. The average of the front-month crack was $19.65/bbl from January 1st, 2017 to December 31st, 2021. In October 2021, the Nymex crack averaged $24.22/bbl as the US began to emerge from pandemic-driven lockdowns and the economy continued to show signs of recovery. From this perspective, 2022 has been a stand-out year for gasoil refining margins.
Meanwhile, US exports have been high for several months. In July, 1.3 Mbd were exported, the highest since August 2019. It is not unusual for US exports to climb during the hotter summer months as domestic demand falls and refineries are typically running hard to produce as much gasoline as they can for driving season, which leaves by-product diesel in surplus and needing to be shipped overseas. What may be surprising, however, is that even in October, the US exported almost 1.0 Mbd of gasoil, the highest October export volume since 2018 when 1.1 Mbd were shipped. Adding to the surprise, therefore, is that against a backdrop of high domestic prices, the US is still exporting at such elevated levels.
Brazil and Mexico have been the largest importers of US gasoil by volume to satisfy local demand during the season of peak agricultural activity. But if domestic prices are so high, how are Brazil and Mexico able to attract barrels away from that lucrative domestic retail market? The answer may lie in US logistics.
The US Gulf Coast refines both domestic and imported crude, but there is far more output than the local population needs. The highest demand for diesel (and for gasoline, of course) lies on the Atlantic seaboard, at the other end of the Colonial pipeline. When the states of the Northeast want gasoline for driving season, then Gulf Coast refiners respond by maximizing gasoline production and the subsequent transmission of it along the pipeline. The pipeline has almost no spare capacity, so even when Nymex diesel prices are higher than Nymex gasoline prices, there is limited flexibility available for either the owners or the users of the pipeline to change the movement of gasoil. Slots on the pipeline are also booked in advance, and holders of those slots may be reluctant to give up their gasoline slot in favor of a gasoil shipment for someone else (although trading of pipeline capacity does take place). What use is a gasoline retail station that has no gasoline?
While changes in the daily pumping program of the Colonial pipeline are possible to an extent, and they could mean an increase in diesel supply to the population centers of the Northeast, the US faces persistently low gasoil inventories this winter. The global market is offering little respite; in fact, it is exacerbating the situation. With Russian sanctions looming on the horizon, EU-27 countries are pivoting away from Russian material, only adding to global supply tightness. This will inevitably lead to continued elevated wholesale and retail prices, as US barrels price to remain at home.
US gasoil exports by destination (kbd) – main receivers