The diesel market is in a perfect storm as prices surge, supply dwindles ahead of winter
An aerial view of Phillips 66 oil refinery is seen in Linden, New Jersey, United States on May 11, 2022.
Anadolu Agency | Anadolu Agency | Getty Images
A perfect storm is taking place in the diesel market, with dwindling diesel reserves, a drought on the Mississippi River pushing more product to rail and truck, and a possible rail strike leading to a surge in prices that is expected to continue.
Diesel prices have increased by 33% for November deliveries.
“The national average price for diesel today is $5.30 per gallon and is expected to go up 15 to 20 cents in the next few weeks,” said Andy Lipow, president of Lipow Oil Associates, LLC.
Reserves for diesel this time of year have not been this low since 1951, with the greatest shortfall in the Northeast region including New York and New England.
“This is not only constricting the ability of farmers to export the soybeans and grain they grow but also to receive the fuel and fertilizer they need to operate,” said Mike Steenhoek executive director of the Soy Transportation Coalition of the low water conditions that have turned the Mississippi River from a multi-lane interstate to a two-lane highway.
“Now adding insult to injury is the increased uncertainty that railroads will be able to provide an effective lifeline during this critical time. It’s a vivid reminder that it is not enough to produce a crop or have demand for that crop. Having a reliable supply chain that connects supply with demand is also essential for farmers to be successful,” Steenhoek said.
Two rail unions recently voted down a labor deal needed to avert a national strike in the coming months.
East Coast refineries operating at max capacity
Diesel inventories in the New York/New England markets are facing an acute crisis, down over 50% since last year and at the lowest level since 1990, according to Lipow.
Lipow said East Coast refineries are making as much diesel as they can and dependent on tankers and barges for supply, any weather delay causes a terminal to run out of product..
According to the EIA, East Coast refineries operated at 100% capacity in June and July.
“Last week, they operated at 102% of capacity,” Lipow said. “No more supply is forthcoming from the four East Coast refineries.”
New England’s diesel supply issues were made worse when a Canadian refinery in Newfoundland shut down in 2020 as the pandemic impacted on demand.
The Midwest is also seeing supply constraints, pushing up costs for farmers.
“In visiting with a number of farmers, the consensus, of course, is that diesel costs are one more incursion into profitability,” Steenhoek said. “As far as getting supplies, it looks like those areas most dependent upon the river are experiencing the biggest challenge. A couple of farmers told me diesel supply via their local vendor is day to day.”
Jones Act restrictions on foreign vessels
In order for the Northeast to receive more diesel, the fuel needs to be imported from another country or a tanker from the Gulf Coast, but that is not allowed because of the Jones Act, also known as the Merchant Marine Act of 1920, which prohibits a foreign vessel from transporting all goods between two U.S. ports.
“The Jones Act requires all cargo transported between U.S. ports be carried on ships that are U.S. flagged and built, and mostly owned and crewed by Americans,” said Captain Adil Ashiq, United States Western region executive for MarineTraffic.
According to MarineTraffic, the 56 Jones Act tankers are being used. One way to add more supply quickly is for the Department of Homeland Security to temporarily waive the act for foreign vessels to move the fuel. The Jones Act was last waived for a tanker filled with diesel from the Gulf to go to hurricane-stricken Puerto Rico where the energy was needed for power generators.
As a result of the small quantity of U.S.-owned and operated tankers available for energy transport, the price to book a Jones Act tanker is about double that of a foreign-flagged tanker. For example, a Jones Act tanker carrying 300,000 barrels of diesel from Houston to Boston costs approximately 16 cents per gallon. If the Jones Act was waived, a foreign flag tanker carrying the same amount of fuel and heading to the identical location is estimated to cost half, 8 cents per gallon. This 8-cent per gallon difference translates into a $1 million savings per tanker. This is one of the reasons why energy traders favor using foreign flag tankers versus Jones Act tankers.
“If the [Biden] administration wants to replenish New England gasoline or distillate inventories at the expense of exports, they need to waive the Jones Act for refined products loading on the Gulf Coast for delivery to New York, New Jersey, and New England,” Lipow said. “Unfortunately, I don’t think they will do it until it is too late.”
Traders profit, Russia ban looms
Traders are diverting tankers away from Europe to the U.S. because the price of U.S. diesel is now higher than in Europe so they can make a larger profit. So far, two tankers have arrived and unloaded.
According to MarineTraffic, the tanker Thundercat was originally destined for the Netherlands after being loaded in the Middle East with about 650,000 barrels (the equivalent of 27 million gallons) of diesel. It went to New York. Another tanker, Proteus Jessica, loaded in the Singapore area with a similar diesel supply also headed to New York.
For regions including New England, competition with Europe for diesel supplies will intensify next year when an EU ban on Russian refined product purchases is implemented, Lipow said. Diesel exports are of particular interest with the date of February 5, 2023, when the EU sanctions on Russian refined oil products begin, said BIMCO’s chief shipping analyst Niels Rasmussen, adding that 90% of the EU’s import volumes are diesel.
“The EU must replace on average 2 million tons of diesel imports from Russia,” Rasmussen said. “In addition, the International Energy Agency has estimated that the EU’s demand for refined products will increase by 300,000-500,000 barrels per day during winter to meet heating demands.”
Environment
Elon Musk Tapped to Lead New ‘DOGE’ Department—Despite the Government Already Having One for Efficiency
Tesla CEO Elon Musk is to officially join Trump’s administration as the co-head of the new US Department of Government Efficiency – a second federal department with the goal of making government spending more efficient.
You can’t get more ironic than that.
Throughout the elections, Musk, who is already CEO of Tesla, and SpaceX, a well as the defacto head of X, xAI, Neuralink, and the Boring Company, has been floating the idea to add to his workload by joining the Trump’s administration to lead a new department aimed at making the federal government more efficient.
He has been calling it the “Department of Government Efficiency”, which spells out ‘DOGE’, a meme that Musk appears to enjoy.
Well, now Trump appears to want to be going through with this idea.
He announced the new department and Musk as head, along with Vivek Ramaswamy, in a statement today:
I am pleased to announce that the Great Elon Musk, working in conjunction with American Patriot Vivek Ramaswamy, will lead the Department of Government Efficiency (“DOGE”). Together, these two wonderful Americans will pave the way for my Administration to dismantle Government Bureaucracy, slash excess regulations, cut wasteful expenditures, and restructure Federal Agencies – Essential to the “Save America” Movement. “This will send shockwaves through the system, and anyone involved in Government waste, which is a lot of people!” stated Mr. Musk.
What’s most ironic is that there’s already a federal department with the goal of cutting government waste and ensuring efficiency: the Government Accountability Office (GAO).
The GAO’s main objectives are:
- auditing agency operations to determine whether federal funds are being spent efficiently and effectively;
- investigating allegations of illegal and improper activities;
- reporting on how well government programs and policies are meeting their objectives;
- performing policy analyses and outlining options for congressional consideration;
- issuing legal decisions and opinions;
- advising Congress and the heads of executive agencies about ways to make government more efficient and effective
It sounds similar to what Musk described when talking about his DOGE, but Trump hasn’t gone into many details other than it will “cut waste.”
He also has a confusing message as he compares the initiative, which is supposed to cut government spending, to “The Manhattan project”, a massive and expensive government project.
Trump said that DOGE will help the government “drive large scale structural reform”:
It will become, potentially, “The Manhattan Project” of our time. Republican politicians have dreamed about the objectives of “DOGE” for a very long time. To drive this kind of drastic change, the Department of Government Efficiency will provide advice and guidance from outside of Government, and will partner with the White House and Office of Management & Budget to drive large scale structural reform, and create an entrepreneurial approach to Government never seen before.
The statement also noted that DOGE will only operate until July 4, 2026.
Musk has previously claimed that he could cut at least $2 trillion dollars of the $6.5 trillion dollar US federal budget.
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A pump jack in Midland, Texas, US, on Thursday, Oct. 3, 2024.
Anthony Prieto | Bloomberg | Getty Images
Oil prices may see a drastic fall in the event that oil alliance OPEC+ unwinds its existing output cuts, said market watchers who are predicting a bearish year ahead for crude.
“There is more fear about 2025’s oil prices than there has been since years — any year I can remember, since the Arab Spring,” said Tom Kloza, global head of energy analysis at OPIS, an oil price reporting agency.
“You could get down to $30 or $40 a barrel if OPEC unwound and didn’t have any kind of real agreement to rein in production. They’ve seen their market share really dwindle through the years,” Kloza added.
A decline to $40 a barrel would mean around a 40% erasure of current crude prices. Global benchmark Brent is currently trading at $72 a barrel, while U.S. West Texas Intermediate futures are around $68 per barrel.
Oil prices year-to-date
Given that oil demand growth next year probably won’t be much more than 1 million barrels a day, a full unwinding of OPEC+ supply cuts in 2025 would “undoubtedly see a very steep slide in crude prices, possibly toward $40 a barrel,” Henning Gloystein, head of energy, climate and resources at Eurasia Group, told CNBC.
Similarly, MST Marquee’s senior energy analyst Saul Kavonic posited that should OPEC+ unwind cuts without regard to demand, it would “effectively amount to a price war over market share that could send oil to lows not seen since Covid.”
However, the alliance is more likely to opt for a gradual unwinding early next year, compared to a full scale and immediate one, the analysts said.
Should the producers group proceed with their production plan, the market surplus could nearly double.
Martoccia Francesco
Energy strategist at Citi
The oil cartel has been exercising discipline in maintaining its voluntary output cuts, to the point of extending them.
In September, OPEC+ postponed plans to begin gradually rolling back on the 2.2 million barrels per day of voluntary cuts by two months in an effort to stem the slide of oil prices. The 2.2 million bpd cut, which was implemented over the second and third quarters, had been due to expire at the end of September.
At the start of this month, the oil cartel again decided to delay the planned oil output increase by another month to the end of December.
Oil prices have been weighed by a sluggish post-Covid recovery in demand from China, the world’s second-largest economy and leading crude oil importer. In its monthly report released Tuesday, OPEC lowered its 2025 global oil demand growth forecast from 1.6 million barrels per day to 1.5 million barrels per day.
The pressured prices were also conflagrated by a perceivably oversupplied market, especially as key oil producers outside the OPEC alliance like the U.S., Canada, Guyana and Brazil are also planning to add supply, Gloystein highlighted.
Bearish year ahead for oil
The market consensus is that there’ll be a “substantial” oil stock build next year, said Citibank energy strategist Martoccia Francesco.
“Should the producers group proceed with their production plan, the market surplus could nearly double… reaching as much as 1.6 million barrels per day,” said Francesco.
Even if OPEC+ doesn’t unwind the cuts, the future ofl prices is still looking break. Citi analysts expect Brent price to average $60 per barrel next year.
Further fueling the bearish outlook is the incoming administration of U.S. President-elect Donald Trump, whose return is associated by some with a potential trade war, said analysts who spoke to CNBC.
“If we do get a trade war — and a lot of economists think that a trade war is possible, and particularly against China — we could see much, much lower prices,” said OPIS’ Kloza.
Trump has also touted a “drill baby drill” policy for U.S. producers, vowing to cut energy prices in half.
For that to happen to retail gasoline prices, oil would need to drop to “below $40” per barrel, said Matt Smith, Kpler’s lead oil analyst.
Right now, retail gasoline prices are at a “sweet spot” at $3 per gallon, where consumers do not feel the pinch and input prices are still sufficiently high for producers, Smith added.
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