Winter’s Grip Loosens, But Diesel Prices Keep Climbing

The runaway diesel train continues with the March ULSD contract approaching the 2 year high set during the January deep freeze, while WTI hovers near a 7 month high.

Once again extreme winter weather is getting much of the credit for the spike in diesel prices, as the North East digs out from record-setting snow fall, although there are signs that things may be much different this time around. While several power outages were noted Monday, it appears that most fuel terminals in the region are operational this morning while a few are still racing to clear snow so trucks can access the facilities. A friendly reminder from a carrier in the region: Before you place a fuel order today, please make sure you’ve got clear access to your site and your fills are cleared.

While there’s no doubt that PADD 1 diesel inventories are tight, and holding below their seasonal range, this latest spike doesn’t seem to have the demand factor that we saw a month ago during a similar squeeze to end the month. It’s also worth noting that the 3 other times in the past 12 months we’ve seen ULSD futures break above $2.70, we saw a 40 cent drop within a few weeks, most of which was caused by sharp backwardation in time spreads. That phenomenon is certainly at play in this latest squeeze with March trading 18 cents above April futures, which will take the prompt position next week.

The EIA’s electric grid monitor shows that the New England region isn’t burning any petroleum to generate power during this latest event as natural gas supplies have been able to sustain the bulk of the supply needs so far. The charts below show the stark difference to the storm in late January in which Petroleum power generation actually exceeded natural gas production as utilities curtailed their gas usage for nearly a week. On top of the lack of diesel demand for power generation, temperatures are expected to be in the 40s tomorrow after a brief shot of cold air tonight, so heating oil demand will not be excessive.

Right or wrong, there’s no mistaking the race to resupply the east coast with diesel as premiums to ship along Colonial’s main distillate line (Line 2) have reached 9 cents this week, marking the highest levels we’ve seen since December of 2023.

Most other U.S. markets aren’t feeling the squeeze on diesel, with negative basis differentials the norm across the middle of the country and the South West, even for the cash markets already trading against the April contract which is priced nearly 18 cents below March. The exception comes in the North West where Valero’s Benecia shutdown is combined with ongoing delays in PBF fully restarting its Martinez facility and the 2 local RD production sites are both undergoing work as well pushing San Francisco spots to double digit premiums. The PNW market is also still dealing with ongoing refinery maintenance and another shutdown of the Olympic pipeline in the past couple of weeks, which is helping values stay elevated in that region as well .

As we passed the 4th anniversary of Russia’s full invasion of Ukraine, the UK and Australia announced a new sanctions package they call the largest yet, targeting Russian oil pipeline company Transneft, and 175 firms involved in shadow fleet shipping.

On the flip side of that coin, Slovakia is giving another example of just how hard it is for some countries to find an alternative to Russian energy supplies as it is halting emergency electricity supplies to Ukraine while the two countries dispute oil deliveries via the Druzhba pipeline that flows through Russia through Ukraine.

The EIA highlighted Monday how several planned retirements of coal and natural gas power plants may be delayed this year thanks to both the changing EPA policies, and the rapid increase in demand that’s expected in many parts of the country.