Diesel Update From Mark Rossano

Freedom Financial Archive | Originally posted Nov 11, 2022

Diesel Itself

When you look at the distillate side, which is that middle cut of the cracker itself, we continue to see massive shortfalls.

And just looking at the data today, we continue to be very short on the distillate side. But I think it's important to look at how short and where are we short.

Some of the big pieces, we had a draw of 520,000 Barrels which takes us 23.6 million below the five-year average countrywide.

But the problem is “Where are we short?”

Because most, if not all the shortfall, is driven by PADD 1 (East Coast), especially PADD 1A (New England), PADD 1B (Tri-state area into the mid-Atlantic).

We continue to see a massive shortage and now our imports have gone up because of that. Our imports increased to roughly 206,000 barrels a day with most of that coming into the East Coast.

Why? Because there's demand.

And the price of shipping product has increased because of miles per ton. Miles per ton is how many miles is one ship traveling and just the demand for moving distillate around the world.

So, when you look at just the different backdrops, PADD 3 (Gulf of Mexico) has a normal storage level.

So, the question is, “Well, why can't we get it from PADD 3 (Gulf of Mexico) to PADD 1 (East Coast)?”

It's because we don't have the pipeline capacity. We have the Colonial Pipeline’s line one and line two completely maxed out.

We also have the Jones Act, which makes it prohibitive to move from the Houston ship channel up into PADD 1.

So realistically the distillate side coming from the Gulf of Mexico can go into the international market.

And we did see exports increase.

But by exporting that product into Europe, that then frees up some of the product coming from the Middle East and West India to come into the Atlantic basin and eventually into the US markets.

One of the key pieces when we talk about this is the worldwide shortage.

And one of the key quotes that I wanted to pull out comes from Fujairah (in the United Arab Emirates).

“The swing gas oil barrels offered in varying tenders loading from the Arab Gulf and West Coast India region could be pulled West amid a still viable arbitrage economics.”

And that's something that we expect to see accelerate because there's just such a shortfall as it gets colder. I'm sure most people have seen the weather reports. Winter is finally coming to an area near you. That's going to massively increase demand.

So, we have that demand side, but the trucking side continues to get worse.

You know, we're going to have another write-up of just how problematic the shipping side is.

But again, this is a problem on an economic level.

So even as that diesel demand for transport comes down, we're going to have the diesel demand for heating come up.

And that's really going to help offset some of the different pieces.

There are a lot of things to look at when we start looking at pricing.

That’s why we expect the diesel crack and the disliked crack to stay between $67 and $75 (tightly within this range), which is at a significant premium compared to previous years.

And realistically one of the highest has been of all time.

Now the problem with that is that is the only thing supporting us when you look at the pricing levels, so gasoline storage came down.

What’s Going on Worldwide?

There's a record amount of storage in Europe. There's a record amount of storage in Singapore and Asia on the gasoline front.

The reason why it's not coming from Europe to the US is that the arbitrage is closed due to shipping.

If you have an opportunity of shipping diesel or shipping gasoline, which do you think is going to have the most value now?

The answer has been diesel.

That’s created a problem for other areas where the gasoline crack – how you make money on making gasoline – has gone down or is negative.

So that means refiners are only making money on making diesel in Europe and Asia.

If that were to weaken now you run into the problem of “Well, how are we going to make money?” and that's when you can start seeing economic run cuts.

And those are things that we're going to be watching because China's supposed to increase their exports of gasoline.

And we've already seen some of that gasoline show up in the Asian markets.

So as that pushes things down, we're going to start to see some of these shifts that we want to pay attention to, because it's going to continue to pivot where the market is going on a refined product side.

On the Crude side, India continues to be a massive importer of Russian crude, even though three of their assets said, “Oh no, we're going to respect the European cap and we're not going to buy new Russian crude.”

No, they’re not going to buy anymore because they they're maxed out on crude they already bought!

So, if you're maxed out, you know, you're not going to buy anymore, why not make it a political win?

And that's where we have today so we do see a lot of that Russian crude going through. But there's also a lot of the Middle Eastern crude flowing as well, just because that is where you have the highest distillate available.

So, we've started to see some of those prices come down as they compete into the market. And we've seen some of that pickup in terms of sales going into the market in general, which is then left more West African crude in the market struggling to find a home. Those prices are coming down.

US exports are going to remain robust, say at about 3.8 million barrels a day, based on what's going to Asia and Europe.

Because we’re still cheap compared to Brent and some of the Middle Eastern blends, where they let some of the lighter sweets either increase price or kept them flat, which again keeps us competitive moving into the market.

Wrap Up

So that's a quick wrap on what I see.

Diesel still going to be short.

We still have diesel prices going up.

I'm sure you've seen it by going to the to the gas station around you. And one of the things is we think diesel prices are going to go closer on a national average basis to about $5.40.

If you have any questions, please feel free to reach out if you want me to go deeper into any of these again.

And have a great weekend!

Kind regards,

Freedom Financial News