While All Eyes Are On Oil – Dangerous Tipping Point For Diesel Weeks Away

Tyler Durden

For all the drama surrounding Biden’s latest Strategic Petroleum Reserve fiasco and his admin’s ridiculous idea to “stimulate” US energy producers to pump more oil because, you see, Biden promises to buy oil at some unknown point in the future (he may or may not, but right now he is certainly draining a million barrels of emergency US energy lifeblood just to buy a few midterm votes, assuring energy producers have zero incentive to produce more), the real crisis is not oil or gas, but diesel.
The problem is that as we repeatedly warned over the summer, even as others were transfixed by the moves in gas… the crisis gripping the US diesel market is getting out of hand, as demand is surging while supplies remain at the lowest seasonal level for this time of year ever, according to government data released Wednesday.
According to the EIA, the US now has just 23 days of diesel supply, the lowest since 2008; and while inventories are record low, the four-week rolling average of distillates supplied – a proxy for demand – rose to its highest seasonal level since 2007.
In short, record low supply (courtesy of stifling regulations that have led to a historic shortage of refining capacity) meet record high demand. What comes next is, well, ugly (while weekly demand dipped slightly in the latest week, it’s still at highest point in two years amid higher trucking, farming and heating use).
The shortage of the fuel used for heating and trucking and – generally speaking – to keep commerce and freight running, has become a key worry for the Biden administration heading into winter, perhaps even bigger than the price of gas heading into the midterms.  As Bloomberg’s Javier Blas writes, “such low levels are alarming because diesel is the workhorse of the global economy. It powers trucks and vans, excavators, freight trains and ships. A shortage would mean higher costs for everything from trucking to farming to construction.”
National Economic Council Director Brian Deese told Bloomberg TV Wednesday that that diesel inventories are “unacceptably low” and “all options are on the table” to build supplies and reduce retail prices.
But while the White House claims to be so very concerned about the coming diesel crisis, it is doing absolutely nothing besides draining the SPR which has zero impact on diesel production.
The historic diesel crunch comes with the midterm elections and will almost certainly drive up prices for consumers who already view inflation and the economy as a top voting issue. Retail prices have been steadily climbing for more than two weeks. At $5.324 a gallon, they’re 50% higher than this time last year, according to AAA data.
Wholesale diesel prices in the spot market of New York harbor, a key pricing point, have surged this week to more than $200 per barrel. Excluding a brief interval from late April into mid-May, that would be a record high.
As a result, American refiners are enjoying the best-ever diesel margins, with the profit of turning a barrel of crude into one of diesel – i.e., the diesel crack spread – hitting a record high of $86.5 per barrel, up roughly 450% from the 2000-2020 average of $15.7 per barrel.
This isn’t all that surprising. as we have been warning all year, the American diesel market has been in crisis mode for most of 2022; if only others had caught on this crisis may have been averted. But now, it’s too late, and national stockpiles have drained as refiners entered maintenance season and as Russia’s war in Ukraine tightened global supplies and limited imports.
Meanwhile, market backwardation – where prompt deliveries are priced at a premium over future deliveries – has made building inventory extremely costly, feeding into a vicious cycle of tight supplies and price spikes. In New England, where more people burn fuel for heating than anywhere else in the country, stockpiles are less than a third of typical levels for this time of year.
Thanks again, President Biden.
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