Diesel crack spreads remain at or near record highs, storage levels are tight and days of supply are low - in short there isn't much good news
Diesel tightness seems to be the dog wagging the oil markets tail currently
Little can be done near-term to add refining capacity or quickly add to product stocks to loosen the market
We believe it would be a policy error to restrict product exports but exports are indeed the elephant in the room, in our opinion
As always, we think a picture tells a thousand words
Black Swan or Just Ugly Duckling For Consumers
Recent diesel cracks spreads have witness a six standard deviations move.
In normal distributions, six sigma events happen roughly once every 1.4 million years. Unlike the recent large Powerball, this isn't a low probability event jackpot for U.S. consumers.
Highlighting the diesel tightness, diesel cracks are 3-4 times those of gasoline.
Crack spreads have pushed the oil-equivalent price of diesel toward $180 per barrel in recent weeks.
U.S. diesel/distillate storage for this week of the year is the lowest since at least the early 1980s.
Storage levels in PADD I (Northeast) are particularly worrisome.
Diesel demand (defined by EIA products supplied) remains strong.
U.S. storage levels and diesel demand are used to calculate days of supply, which are at the lower end of the dataset.
Despite the rhetoric around refining tightness, U.S. refineries continue to produce historically high amounts of diesel.
So what does U.S. diesel production look like relative to demand?
At a 1.0x ratio in this chart, U.S. refineries produce at an equivalent amount of demand for distillates. Above one means refineries produce more than is being utilized domestically, while below one equates into producing less than domestic demand.
About that elephant. Global exports are the outlet for excess distillate production from U.S. refineries at +/- 1 million barrels per day.
A number of factors are driving tightness in U.S. and global diesel markets. It would be naive to think the U.S. would be insulated from global pricing in the event product exports were restricted by the Biden Administration through executive order, if possible. Pipeline infrastructure doesn't exist to freely and easily move product from and to all part of the lower-48 states. Regional refining configurations and slates differ; being landlocked versus having access to seaborne oil matters.
We believe a temporary repeal of the Jones Act makes sense for short-term relief for the Northeast U.S., but the issue appears to have strong political resistance to change.
Diesel remains in the danger zone. Keep a close eye on these metrics to see where oil is headed.