How Recent Extreme Winter Weather Drove a Surge in Diesel Prices

Sudden and severe weather events create significant volatility in the energy market, often leading to unpredictable spikes in wholesale diesel prices. For supply chain leaders, this instability presents a major challenge to budgeting and operational planning. By understanding the key factors that drive these price movements, organizations can better anticipate market shifts and manage fuel costs more effectively. 

Key takeaways 

• Extreme cold weather events directly impact diesel refinery operations, often leading to temporary shutdowns and a reduction in production capacity. 

• Increased demand for heating fuels and power generation can cause utilities to switch from natural gas to diesel, which further tightens distillate supply. 

• The combination of lower production and higher demand causes diesel refinery margins and therefore wholesale diesel prices to increase. 

• Long-term trends, including permanent refinery closures in the U.S. and Europe, suggest that the diesel market will remain sensitive to disruptions, pointing toward continued volatility. 

A wave of frigid Arctic air gripped much of the United States in late January and early February, shocking national energy markets. This cold snap demonstrated how interconnected the modern energy system is and how quickly market conditions can change. Here are four ways the extreme winter weather impacted diesel supply and pricing. 

1. Frigid temperatures increased demand for heating fuels 

As temperatures fell into single digits and even negative territory across the country, demand for heating fuels like natural gas, heating oil, and diesel fuel rose sharply. According to the National Oceanic and Atmospheric Administration (NOAA), the nation experienced a period of sustained cold, which created immediate stress across the energy market. This initial surge in consumption was the first domino to fall, creating higher demand and tightening supply across all heating fuels. 

2. Fuel switching added pressure to distillate markets 

One of the most significant consequences of the cold was the spike in natural gas demand for residential and commercial heating. This prioritization tightened supply for power generators just as overall electricity demand soared. 

When natural gas becomes expensive or constrained, utilities with dual-fuel capabilities often switch to diesel to maintain grid reliability. Approximately 13 percent of U.S. power generation capacity, about 138 gigawatts, can run on either natural gas or diesel. This fuel switching, especially common in the pipeline-constrained Northeast, placed additional pressure on already tight distillate markets and contributed to rising prices. 

3. Winter storms forced refinery capacity being taken offline 

While demand was rising, winter storms delivered heavy snow and freezing rain that disrupted production. These conditions are especially challenging for refinery operations, particularly in the Gulf Coast and Midwest. Refining facilities are not designed to operate in extreme cold. When equipment begins to ice over, production is often reduced or temporarily shut down. 

Freezing conditions caused mechanical failures, power interruptions, and precautionary shutdowns. Across the affected regions, the refineries impacted by these outages represent approximately 1.3 to 1.4 million barrels per day of refining capacity. This sudden reduction in operational capacity occurred at the exact moment demand was peaking. 

4. Refinery margins and diesel prices surged 

The combination of rising demand and falling supply made a quick appearance in refinery margins. This margin—the difference between the cost of crude oil and the commodity value of diesel—represents the cost of turning crude into a usable product and accounts for roughly 25 to 27 percent of the price of diesel. 

In January, refinery margins surged from around $30 per barrel to well over $48 per barrel, a level not seen since the previous November. This rapid increase pushed wholesale diesel prices back above $3 per gallon. 

A look at the road ahead for refinery margins 

Although temperatures have moderated and provided some short-term relief, the structural dynamics of the fuel market suggest continued volatility. The U.S. and Europe are experiencing a multi-year decline in refining capacity as facilities permanently close or convert to renewable production. Recent and upcoming closures, like those in California, are reducing the nation’s ability to meet distillate demand, especially during periods of disruption. 

The events of this winter serve as a clear reminder that in a more constrained refining environment, weather events like those we experienced in January can have an outsized impact on fuel markets. For shippers, staying informed on these trends is essential for navigating the complexities of fuel procurement and managing transportation spend. 

Managing fuel costs in a volatile market is crucial for building a resilient supply chain. Fuel recovery strategies help ensure you're reimbursing carriers at fair and accurate rates, and help to minimize costs overall. By using real-time data for smarter fuel management, businesses can stay agile and better navigate market fluctuations. Exploring these strategies can make a real difference in keeping your operations running smoothly. 

Frequently asked questions about refinery margins 

How does cold weather affect refineries? 

Cold weather can cause significant disruptions for a refinery. Freezing temperatures can lead to mechanical failures, power interruptions, and equipment malfunctions. To prevent long-term damage, refineries, especially those in warmer climates like the Gulf Coast that are not winterized, are often forced to reduce production or shut down temporarily. 

What is a refinery margin? 

A refinery margin is the difference between the price of crude oil and the commodity cost of refined diesel fuel. It essentially represents the value added by the refining process. This margin is a key component of the final wholesale diesel price, typically accounting for 25 to 27 percent of the cost. 

How can shippers prepare for fuel market volatility? 

Shippers can mitigate the impact of volatile fuel prices by staying informed on market trends, exploring different fuel procurement strategies, and building flexibility into their budgets. Understanding the factors that drive price changes, like refinery capacity and weather events, is key to managing transportation costs effectively.