Addressing U.S. Diesel Shortage Claims | Breakthrough Advisor Pulse

Diesel Market Update

The U.S. Energy Information Administration shared a weekly inventory report that indicated U.S. diesel inventories fell to 25.9 days of supply for the week ending October 21, 2022. The tight inventory has led some market commentators and analysts to announce a diesel shortage in the U.S., especially along the East Coast in Petroleum Area Defense District 1 (PADD 1).

“While we do expect diesel inventories will remain tight for the East Coast through winter, we do not expect there to be prolonged diesel supply outages or extended shortages at truck stops and fuel terminals at this time. We do, however, expect tight diesel inventories to lead to elevated prices and a continuation of volatility in the market.”

- Matt Muenster, Chief Economist, Breakthrough

Tight East Coast diesel inventories can be largely attributed to lower diesel production due to refinery closures, refinery maintenance season, high diesel exports, and low imports. Additionally, U.S. diesel demand has persisted at elevated levels attributed to disruption in the supply chain, agricultural production, and a larger-than-usual pull into heating oil markets—particularly in Europe.

Despite these factors we do not anticipate the U.S. will exhaust diesel inventories. Considerations leading us to this conclusion is the U.S. currently exports more diesel fuel than it imports. Additionally, when observing PADD region inventory levels across the U.S., PADD 3 and PADD 5 are within what would be considered a “normal” inventory range, and PADD 2 and PADD 4 are slightly below average. PADD 1 remains an outlier as it is well below what would be considered normal levels.

Concerns around PADD 1 are primarily limited to the New England (PADD 1A) and Central Atlantic (PADD 1B) markets as they are tracking 55 and 40 percent below year-ago levels, respectively (see chart below). To add pressure, PADD 1B lost refinery capacity in recent years, which is contributing to the tightness in the Northeast. Still, more than 11 million barrels of diesel inventory remains in PADD 1B, while 3 million barrels of diesel inventory remains in PADD 1A.

Omitted from the shortage narrative, the Colonial Pipeline has not recently allocated maximum diesel supply to PADD 1 due to the U.S. Gulf Coast experiencing higher diesel arbitrage to Europe. However, as the East Coast has felt the pinch of low diesel supplies—causing prices to rise—it has encouraged producers to redirect product flow through the pipeline. At the time of publication, the pipeline is at max capacity, which should begin to ease the shortage of supply.

Shippers and carriers should continue to examine the past twelve months and consider energy cost expectations as motivation to analyze and improve their transportation network strategy. Opportunities exist to create or maintain a competitive advantage while navigating one of the most challenging energy markets in decades.

Please contact the Applied Knowledge team, appliedknowledge@breakthroughfuel.com, for further market knowledge.