Yves here. We’ve been warning for months that diesel supplies were tight in the US and Europe, with no strong reason to think they’d get much better and cause to think the squeeze could worsen.

Even though the mainstream press is finally taking notice of diesel scarcity, the commentary has gone from largely ignoring the issue to undue panic. The right wing has been hammering on the “US down to only 25 days of diesel storage” as if that means the US will be out of diesel in 25 days. No trucking! No Santa, um Amazon deliveries for the holidays! Grocers bereft of perishables like fresh veg, bread, and milk!

Playing “25 days of storage” as if it means “out in 25 days” is fact-free fearmongering. What will determine the degree of further drawdown of is new supplies versus usage. It is also worth keeping in mind that this level is only 20% below the five year average for this time of year.

However, there are distribution issues, with some parts of the US particularly hard up. It is also pretty certain that the shortages will be largely addressed via rationing via price. That means the diesel shortfall will produce higher delivery costs, which will then get built into end prices for business and consumer goods and services. So even though widespread transit paralysis isn’t in store, letting price be the device to force businesses and consumers to cut back isn’t pretty.

For instance, Fox News picked up and amplified a memo by Mansfield Energy last Friday confirming diesel shortages. Mansfield issued a statement Monday meant to counter the Fox histrionics…but it was far from cheery. Key section:

For diesel specifically, the shortage will be painful at the macro level, but hopefully manageable at the micro level. Put another way – a tight diesel supply will force prices to go up, which will eventually make it too expensive for some people. High prices will bring demand back down enough that it balances with limited supply. At the US economy level, that means pain as consumers cut back and businesses slash costs. At the local, load-by-load level, supply will still be available for those for whom diesel is a business-critical priority.

That’s not to say there won’t occasionally be situations where there is a true physical lack of products. Some cities might run dry on diesel for a few days, at least at the terminal level. But the fuel supply chain is dynamic, and suppliers will rally to fill in any gaps in supply. Once again, those shortages will drive up prices, which will make it economical to long-haul product from surrounding markets which do have supply. The fuel will be delivered but at higher costs.

Now to the take from OilPrice.

By Tsvetana Paraskova, a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. Originally published at OilPrice

  • The U.S. diesel shortage is worsening as distillate inventories crash to multi-year lows.
  • U.S. refiners permanently shut down some refinery capacity at the start of the pandemic when fuel demand plunged.
  • A diesel shortage and high diesel prices don’t bode well for the global economy, which could tip into recession at some point next year.

Multi-year low inventories and constraints in supply are exacerbating a diesel shortage in the United States, especially on the East Coast.

Diesel demand continues to be strong after recovering faster from the pandemic slump than other fuels such as gasoline, refiners say.

But several factors have combined this year to deplete U.S. distillate inventories, which include diesel and heating oil. And ahead of the winter, the distillate fuel crunch is worsening.

U.S. refining capacity is now lower than it was before Covid, as operable refinery capacity shrank in 2021 for a second consecutive year to stand at 17.9 million barrels per calendar day as of January 1, 2022, according to EIAestimates. U.S. refiners permanently shut down some refinery capacity at the start of the pandemic when fuel demand plunged, while others closed facilities to convert them into biofuel refineries.

Some refineries were under maintenance this autumn, reducing the availability of products. In addition, the U.S. banned imports of all Russian energy products after the Russian invasion of Ukraine and hasn’t imported any petroleum products from Russia since April

Lower refinery capacity in the U.S. since the pandemic, seasonal maintenance at refineries globally, and a major strike in France have all combined in recent weeks to create a shortage of middle distillates, not only in the United States, but also worldwide.

The world is also scrambling for diesel supply also in view of the looming EU embargo on Russian fuel imports by sea, expected to kick in in early February.

A diesel shortage and high diesel prices don’t bode well for the global economy, which is slowing down and could tip into recession at some point next year. Distillate fuels are used in transportation, agriculture, manufacturing, and heating

In the U.S., distillate fuel inventories are about 20% below the five-year average for this time of year, according to the EIA’s latest weekly inventoryreport. The U.S. has just 25 days of diesel supply in reserve, with some regional markets very tight.

According to CNBC, U.S. diesel reserves at the end of October have never been so low since 1951, with the Northeast most exposed to low levels of diesel stocks.

Not that refiners aren’t trying—refinery utilization on the East Coast was at 102.5% in the week to October 21, per EIA data.

Yet, distillate inventories are much lower than normal, and diesel and heating oil prices remain high and stoke inflation as they make consumer goods and heating bills more expensive.

Households in the Northeast who rely on heating oil for space heating will see 27% higher bills this winter compared to last winter, the EIA said in its Winter Fuels Outlook in October.

“Our forecast for heating oil margins this winter reflects price pressures that have currently been affecting the U.S. distillate market, including low inventories, low imports, and limited refining capacity,” the EIA said.

For diesel, one fuel supplier has already issued an alert for the East Coast.

“East Coast fuel markets are facing diesel supply constraints due to market economics and tight inventories,” Mansfield said last 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,” the supplier said.

The Biden Administration hasn’t ruled out the idea of limiting U.S. fuel exports in order to restore inventories and lower prices. Refiners are opposed to that idea, saying that “Banning or limiting the export of refined products would likely decrease inventory levels, reduce domestic refining capacity, put upward pressure on consumer fuel prices, and alienate U.S. allies during a time of war.”

Tom Kloza, Global Head of Energy Analysis at OPIS, told USA Today last week, “Between now and the end of November, if we don’t build inventories, the wolf will be at the door.”

“And it will look like a big ugly wolf if it’s a cold winter.”

This entry was posted in Economic fundamentals, Energy markets, Free markets and their discontents, Guest Post, Income disparity, Politics on by Yves Smith.