Diesel inventories on ‘fumes’ as report sees recent stock rise

CHATTANOOGA, Tenn. — Closely watched diesel inventory levels rose last week, according to a report from the Energy Information Administration released the same day that a leading energy risk management executive said the market was “running on fumes.”

“That is a problem for everybody who needs to put it in the truck and burn it,” Elaine Levin, president of Powerhouse, said of the current level of diesel inventories during her Wednesday appearance at the FreightWaves Future of Freight Festival.

The specific numbers released by the EIA on Wednesday, covering the week that ended Friday, showed a significant increase in inventories of ultra-low sulfur diesel (USLD) on the East Coast. Those stocks, along with total distillate inventories for the country as a whole, have been well under historical norms and contributed to higher prices for diesel relative to gasoline and crude.

At this point, with winter looming, improvement in inventory levels will come in increments, not leaps and bounds. But the trend is what will be important.

The total distillate inventory figure for the U.S., which is 85% to 90% diesel with other distillates such as heating oil in the mix, showed a slight increase to 106.78 million barrels, up from 106.357 million. That puts inventories at 81.8% of the five-year average for the final weekly report of October, excluding data from 2020 skewed because of the pandemic. That 81.8% figure is the highest it has been in several weeks. 

There also was improvement in the ULSD figure for the East Coast, as it gained almost 1.6 million barrels, a one-week increase of about 7.5%, a healthy number. Inventories relative to the five-year norm climbed to 60.8% of the average, up from 59.9%. For one week, these all represent decent gains.

Ultra-low sulfur diesel on CME rose 5.63 cents per gallon on the day to settle at $3.6774. That price is for the December contract. With the expiration of the squeezed November contract Monday, the front-month price for December now sits at its lowest level since early October, providing the possibility of some relief to diesel buyers.

Signs of relief are already showing up in wholesale markets. The ULSDR.USA data series in FreightWaves SONAR, which is an average price of wholesale diesel for all of the U.S., fell to $4.197 per gallon Wednesday from $4.311 just two days ago. 

But with the prospect that prices will be elevated throughout the winter, Levin said it could be time for companies exposed to the price of diesel to take some steps to hedge that risk. 

“Many end users of fuel will set a budget, but then they don’t do anything to secure that budget,” she said. “Hoping and praying is not a hedging strategy.”

Levin also said the 106-million-barrel figure for distillate inventories is getting uncomfortably close to the 100-million-barrel level. She called that a key number because inventories less than that start to create operational problems in the fuel distribution system and could lead to allocations. 

According to Levin, fuel surcharges administered by trucking companies have the downside of being tied to a weekly price that can’t necessarily keep up with rising wholesale prices.

Levin also noted the current market structure creates an opportunity to hedge diesel at much lower prices. The market is in backwardation, a structure where the most expensive price is the most current price — in the case of ULSD on the CME, it’s December — and the price slides as the trading calendar is extended. 

For example, the December 2022 settlement of  $3.6774 came on the same day that June ULSD settled at $3.0891 per gallon and December 2023 was at $2.93765 per gallon. Backwardations develop when inventories in a market are tight. 

“There’s actually a sale on oil in the future,” Levin said. “You just need to know how to access it.”

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