Happy Friday!
I have decided to write an update based on the enormous amount of phone calls inquiring about the diesel shortage. I was shocked to learn how widespread the news has run with the story. Whenever there is a contagion in the market or news cycle, I tend to pause and take a 20k foot view. I have spent all week reading and speaking with my network. Some of the greatest analysists agree with my conclusions. Diesel will be tight until Russian products flow freely.
Is there a true shortage right now? No. We need 4.1M barrels per day of diesel and we are producing well over 5M barrels per day. We are exporting a lot right now but leaving enough at home. Some news anchors continue to beat the drums that there are less than 20 days of diesel supply remaining. This is just not true. On average, we only have 30-40 days of diesel supply on hand. Currently, we have 20 days of diesel remaining if all 100+ refineries across the United States shut down at the same time for 20 days, and all imports from Canada and others stopped. What we don’t have right now is a lot of SPARE capacity. All barrels coming out of a refinery are being sold immediately in the spot market or being exported. The futures market is heavily backwardated based on current cash spot market. The reason the spot cash market is so high is because PADD1 (New York Harbor) relies heavily on the Colonial Pipeline and the Products Pipeline (formerly Plantation Pipeline), as well as imports from Europe, Saudi Arabia, and Russia. In order to incentivize PADD2 and PADD3 refineries to ship diesel to PADD1, the price must be high enough compared to export. Starting in November, diesel supplies are finally flowing to PADD1 via pipeline and barge. Shipments look to be steady for the month. Prices will continue stay high, buy supply will be ok.
Now lets talk solution. Many news anchors are calling for banning exports. Well, this would solve the diesel tightness problem, but the price would probably go to $6-7/gallon on diesel. See, if we stop exporting to Europe and Latin America, then their markets go into true shortage causing massive price spikes in the market. Diesel is still based off of the NYMEX which is traded globally, and local refiners are not going to sell diesel at $3 in America versus losing out on $7 exports. So they will charge the higher price at home. Therefore, banning exports will solve the tightness problem, but would be an economic disaster domestically.
Another solution some are saying is to build more refineries and reopen the old ones. Well, there has not been a new refinery built in over 50 years I believe. Plus the cost is astronomical and the time frame to complete is probably ten years. In other words, even if the anticipated 10 year process to obtain a permit were completed, completion of the refinery would be finished 10 years from now; not exactly a realistic solution. Well, the good news is that there are about four major refiners that either down due to maintenance or accidents. All of these refiners will be back online between the coming weeks and Q2 of 2023. Once those refineries are on line, we might start to climb ever so slightly into a small long diesel scenario. And if we truly start to go into demand recession, diesel inventories will also start to slowly build.
But let’s talk about the major elephant in the room: Ukraine/Russia war. Russia exports diesel as well as crude oil. I want to continue to push home that we truly don’t have a global crude oil problem. Much of the “tightness” in the crude market is due to OPEC+ enacting cuts, and Europe/US banning Russian imports. Russia is pushing so hard to keep prices high because they know they will be selling less product. Russia was finding good homes for products, but it’s getting harder as economies start to slow down. If Russia really wanted to play hard ball, they could cut production even further causing a disaster scenario in crude shortness, but also putting Saudi Arabia in a tough spot to see if they would increase to counter. Regardless, Russia is a well developed player in the crude oil market and we need to figure out a way for peace. Yes, Putin is a monster and his actions are deplorable. But in the same breath, when you really dig into the details of the conflict development over the past twenty years, you start to understand where we are today. There must be blueprint for peace, but according to Ukraine last week, they will not negotiate or compromise on anything until all of Ukraine, including Crimea is back under control of Ukraine. I am starting to believe that we should be discussing a peace plan with Ukraine in order to keep funding military support. We can’t afford to be in a never-ending proxy war, and the stakes with energy and Russia have never been more vital for economic recovery and stability coming out of the cool-down from the post “free money and zero interest rates” period. If Ukraine has no desire for work towards a resolution or treaty, I struggle to see a long-term way out of our current global energy supply crunch.
In local news, prices of gasoline went up 80 cents per gallon in 5 day, and then started to fall of a cliff. The retail prices of gasoline at gas stations are going to be all over the place. Diesel prices went up 40 cents in the past week, so retail diesel prices will start to climb above $5/gallon again.
Propane prices are continuing their stable march forward. Supplies are in great shape and corn drying demand is winding down by then end of the month. But once heating demand kicks in and if we start to experience colder than normal time periods, look out. November is looking to be way above normal, but December is looking much colder. January is looking colder than normal, and February is looking to be brutally cold. The projected winter forecast has happened before. In the past when this happened, everyone enjoyed cheaper than normal propane prices going into Christmas, but then prices screamed higher all the way until April. Only time will tell, but if the weather predictions are accurate, I expect more propane usage this year and demand going through April just like the last three years.
As always, if you have any questions, comments, or concerns, please feel free to give us a call.
Best regards,
Jon Crawford