Diesel supplies are very scarce across the Northeast and in the Southeast. Supplies are at the lowest seasonal level for this time of year, and the US only has 24 days left of the industrial fuel in storage. The crisis gripping the diesel market appears to be getting out of hand as one fuel supply logistics company initiated emergency protocols this week.
“Because conditions are rapidly devolving and market economics are changing significantly each day, Mansfield is moving to Alert Level 4 to address market volatility. Mansfield is also moving the Southeast to Code Red, requesting 72-hour notice for deliveries when possible to ensure fuel and freight can be secured at economical levels,” Mansfield Energy wrote in an update to customers on Tuesday. The trucking firm has a fleet of tankers that delivers refined fuel products to more than 8,000 customers nationwide.
Mansfield said in many areas on the East Coast, diesel fuel prices are “30-80 cents higher than the posted market average, because supply is tight.”
“At times, carriers are having to visit multiple terminals to find supply, which delays deliveries and strains local trucking capacity,” the notice continued.
This could mean that the US diesel market is so tight that supplies are running very low in certain areas. The crisis has sent supplies of the industrial fuel that power the economy, from trucks to vans to generators to freight trains to tractors, to the lowest level ever for this time of year.
The latest EIA data shows there are only 24 days of diesel supply, the lowest since 2008; and while inventories are record low, the four-week rolling average of distillates supplied – a proxy for demand – rose to its highest seasonal level since 2007.
Mansfield’s is a warning sign that the record-low storage levels is beginning to impact fuel supply networks.
The shortage of the fuel used for heating and trucking and – generally speaking – to keep commerce and freight running, has become a key worry for the Biden administration heading into winter, perhaps even bigger than the price of gas heading into the midterms. As Bloomberg’s Javier Blas writes, “such low levels are alarming because diesel is the workhorse of the global economy. It powers trucks and vans, excavators, freight trains and ships. A shortage would mean higher costs for everything from trucking to farming to construction.”
National Economic Council Director Brian Deese told Bloomberg TV Wednesday that diesel inventories are “unacceptably low” and “all options are on the table” to build supplies and reduce retail prices.
But while the White House claims to be so very concerned about the coming diesel crisis, it is doing absolutely nothing besides draining the Strategic Petroleum Reserve which has zero impact on diesel production.
This isn’t all that surprising. as we have been warning all year, the American diesel market has been in crisis mode for most of 2022; if only others had caught on this crisis may have been averted. But now, it’s too late, and national stockpiles have drained as refiners entered maintenance season and as Russia’s war in Ukraine tightened global supplies and limited imports.
Meanwhile, market backwardation – where prompt deliveries are priced at a premium over future deliveries – has made building inventory extremely costly, feeding into a vicious cycle of tight supplies and price spikes. In New England, where more people burn fuel for heating than anywhere else in the country, stockpiles are less than a third of typical levels for this time of year.
The reasons for the collapse in inventories and the price surge are four-fold.
First, local diesel demand has recovered quicker than gasoline and jet-fuel from the impact of the pandemic, draining stocks.
Third, and according to many, most important of all, the US also has lower refining capacity than before, reducing its capacity to make fuels.
Fourth is Russia’s invasion of Ukraine. The US was importing a significant amount of Russian fuel oil before the war, which its Gulf of Mexico-based refiners turned into diesel. The trade ended after the White House sanctioned Russian petroleum exports.
The White House can let the market continue doing its job, with surging prices likely denting consumption and boosting supply. With refineries enjoying sky-high margins, more diesel should be coming. But the cost of the laissez-faire approach is higher inflation and a much faster recession as US industries shut down. Because diesel increases trucking costs, it’s a particularly pernicious sort of inflation as it quickly embeds into everything that needs to be transported, lifting core inflation measures.
If the White House opts to intervene, the less harmful measure would be to release a small reserve of diesel that the government keeps for emergencies (clearly, they have no problem doing that). The Northeast Home Heating Oil Reserve only has one million barrels, so it would be, at best, a Band-Aid. But it’s better than nothing, and Biden should order its release. For those asking, releasing more crude from the Strategic Petroleum Reserve would do little to resolve the problem, since the bottleneck is refining.
Other interventions would have significant consequences, potentially harming American allies. In Washington, officials are mulling restricting, or even banning, diesel exports. If the measure is approved, it would leave neighbors including Mexico, Brazil and Chile short of diesel. In July, the last month with available full data, US diesel exports to Latin America hit a record high of 1.2 million barrels, double the amount a decade ago.
Another option is forcing oil companies to build up stocks quickly ahead of the winter by setting a minimum inventory level, similar to what the European Union did for natural gas stockpiles. US officials are particularly worried about the northern part of the US East Coast, where inventories are low both seasonally and in absolute terms.
The region, known in the industry’s jargon as PADD1A, is where the greatest demand is: Of the roughly 5.3 million households that use heating oil in America, more than 80% are in the Northeast. The problem with a mandatory minimum stock level is that it would force American refiners to import more or reduce their exports — or both. The impact in Latin America would be noticeable. Prices in the US may decline, but they will soar elsewhere.
The bottom line, as the Bloomberg energy strategist notes, is that “the timing of today’s diesel crisis couldn’t be worse.” That’s because the EU, which relies still on Russian diesel exports, will ban imports from February onward (assuming it survives the winter). Europe will be short of diesel then, and Biden needs to consider that too.
Ultimately, the imminent arrival of the bone-crushing recession will rebalance the market, reducing demand, particularly as the housing market cools and construction slows down, and consumer demand for goods declines, reducing trucking needs.
That’s a heavy price to pay to resolve the problem, but with an administration as hopelessly clueless as this one… we are sadly out of options.