No Diesel for You

No Diesel for You, Part Two

Freedom Financial Archive | Originally posted Nov 04, 2022

In our last daily, we talked about a few things. Let’s recap:

  • We’re running out of diesel… fast.
  • It’s difficult to get the required diesel to the Northeast because they don’t have the pipeline and rail infrastructure, nor enough Jones Act vessels available to receive it.
  • The UAE and Singapore are also short of diesel. That is, there’s a global supply shortage.
  • As a result, diesel crack spreads have risen to record levels.
  • There’s no real end to the diesel supply shock at the moment.

In this piece, I’ll finish up by talking about American trucking, the Colonial Pipeline, Europe’s fight with America for diesel, and how the OPEC+ isn’t as big a deal as it seems.

Trucking

The trucking market continues to slowdown, which does provide a positive tailwind for diesel supply.

But trucking demand has only moved back to the “historic” normal, so we don’t have a windfall availability anywhere in this market.

There isn’t any “magic bullet” to save us heading into winter.

The only one we have is Mother Nature “gifting” us with a very warm winter.  Depending on your stance of global warming, that is a gift or a curse.

Europe is praying so hard for that; Christianity is seeing a resurgence!

I suppose there are no atheists in the freezing cold.

Check out the Internet Truckstop Index’s rise and fall:

What the FERC?

The Federal Energy Regulatory Commission, or FERC, is an independent agency that regulates the interstate transmission of electricity, natural gas, and oil. FERC also reviews proposals to build liquefied natural gas (LNG) terminals and interstate natural gas pipelines as well as licensing hydropower projects.

The agency has issued a warning for New England and New York sighting a potential shortage of fuel and natural gas in the region.

“The US Northeast is so short on heating oil that the fuel used to power home furnaces is being rationed even before the start of winter. Some wholesalers in Connecticut are putting retailers on allocation, meaning they can only get a limited amount of fuel based on availability, according to Chris Herb, president of the Connecticut Energy Marketers Association, which represents around 600 family-owned retailers in the state.

These retailers must in turn ration their customers.

The measure, designed to prevent panic buying, highlights the extreme fuel tightness across the New York Harbor and New England regions that has attracted the attention of the White House.

National Economic Council Director Brian Deese told Bloomberg Television that diesel inventories are “unacceptably low” and “all options are on the table” to bulk up supply and cut costs to consumers.

We mentioned in New England, more people burn diesel (the ultra-low sulfur grade) to warm their homes than anywhere else in the country. Those stockpiles are a third of typical levels for this time of year.

On the back of these announcements and further shortages in the region, the Colonial Pipeline has seen another spike in nominations following the shifts in the market.

Credit: Fox Business

From Thomson-Reuters:

A nomination is, in the context of the midstream energy industry, a communication from a shipper to advise a pipeline of the amount of gas or oil the shipper intends to transport over a pipeline on a specific date or time from an entry point to an exit point on the system. Nominations are necessary for the pipeline to manage its entire pipeline network and ensure supply will cover the demand.

Space to ship diesel, heating oil and jet fuel on the Colonial Pipeline is surging.

Europe and America Fight for Diesel

PADD 1 (East Coast) saw another shortfall and attracted two shipments away from Europe.

We’ll see additional flows coming across as the East Coast and Europe compete for product.

PADD 3 (Gulf of Mexico) will be important as an exporter to fill some of the demand in the Atlantic Basin

That will alleviate some demand and making more volume available for the East Coast.

It won’t really bring down prices, but it will at least slow the rise at these elevated levels.

France’s waterborne imports of diesel and gasoil in October already surpassed last month’s total as traders react to strike action that slashed the country’s fuel output.

As the strike comes to an end, this will help adjust some of the shortfalls, but there is also a more structural issue in the market given crude qualities.

Italy’s imports of crude from the US climbed to 664,000 tons in August, the highest for any month since at least January 2019. Supplies from Libya – right across the Med from Italy – advanced to 1.05 million tons, the highest since September 2021, from 300,000 tons in July.

Credit: DW

What About the OPEC+ Cuts?

The shift in flows is important to offset the drop in high distillate cuts coming from the Middle East.

China and India have maintained their normal nominations for the Middle East, which will absorb the “hope” for additional supplies available for Europe (or the U.S.).

November has already shown that Asian buyers are taking their full-term contract allocations from the Middle East.

So, they are leaving little to no extra Middle East crude for Europe to replace the Russian crude.

Russian crude oil production will fall as exports struggle, which will push total flows lower.

The extra Middle East crude would have been ideal for Europe because it is distillate rich and would allow European refineries to maximize production and distillate yield.

In the Mediterranean, many refineries were designed to run Arab Light/Med or Iranian Crude Oil.

In Northern Europe they are designed to run Urals (Russian crude).

All three – Arab, Iranian, and Urals – are interchangeable, but two (Iranian and Urals) will be unavailable to European refiners driven by sanctions and the third (Arab) is being reduced.

There are not many alternatives to these blends.

The additional CPC (Kazakhstan) and Libya barrels will help, but it won’t yield the same type of output.

On the African front, some grades have a higher cut of distillate.

But in the aggregate, they can’t be run through a complex refiner.

Nigerian and Angolan are distillate rich if you run through just a simple refinery. But because of its lack of residue, they remain significantly lower yielding than the Urals in a complex refinery.

Looking at the backdrop of the OPEC+ cuts, it’s even lower when you factor in the adjustments from countries already in compliance and additional flows.

I had the initial cuts at about 800,000 barrels (not 1.11 million) and Kazak closer to 400-450,000 barrels returning.

I also have the cuts not made (Iraq and UAE) higher, but it still gets me to the same level of actual cuts equating to 200,000 barrels per day.

Not even close to the 2,000,000 OPEC+ is talking about.

But we’re still in dire need of more diesel. There’s no doubt about that.

Let’s see how the midterm elections pan out and what political changes that may bring to badly needed infrastructure investment.

Have a great weekend!

Kind regards,

Freedom Financial News