I remember, as a teenager, wheeling my ’57 Ford into a gas station and wishing I could put diesel in it.
After all, diesel was selling for about half the price of gasoline.
Now, four decades later, I’ll settle for unleaded regular – which is averaging about $2.22 a gallon, while diesel is averaging nearly $2.35.
How’d that flip-flop in prices happen?
For answers, Land Line went to Jacob Bournazian, an economist with the U. S. Energy Information Administration.
Bournazian said it remains largely a simple matter of supply and demand.
“Diesel markets are basically showing much tighter supply conditions than gasoline for the past 15 months,” Bournazian said. “This summer is just a repeat pattern of last year, in a continuation of that same trend.”
Right now, high-sulfur heating oil – No. 2 distillate heating oil that’s used during the wintertime – is trading at a higher spot price than gasoline.
“That’s an anomaly,” Bournazian said. “You never used to see heating oil more expensive than gasoline in the dead of summer, when demand is supposedly down or non-existent for heating oil.”
Bournazian said inventories – about 68 million barrels of low-sulfur diesel – are at approximately the same level as last year, but that doesn’t mean the supply is the same. Demand per day is up so the supply is actually less.
“With inventories at the lower end of the five-year average, you’d expect the industry to be able to build those inventories into some middle range, to give a nice supply cushion going into the wintertime,” he said.
According to Bournazian, the industry has only eight weeks to go to do their best to rebuild inventories and then we’re back into the winter heating cycle when demand increases for both low sulfur diesel and fuel oil.
“And those supplies will then get drawn down from whatever they are,” he said.
So the inventory is a really big problem.
Bournazian explained that while refiners would normally be expected to be able to add about six million barrels per month to inventory – more than half of it to fuel oil – that hasn’t happened.
“Over the course of May and June, you would have expected 10 to 12 million barrels to be added to inventory, when in fact, inventory has been growing sluggishly,” he said. “In the last two months, low sulfur diesel inventory has grown by only three million, high sulfur has gone up by five million (barrels).”
Why can’t refiners rebuild those inventories at a normal historical rate? Bournazian said high demand is undermining strong production.
“Production runs are higher – we’re producing about 300,000 more barrels per day of diesel. It’s just that demand is up by 100,000 to 200,000 barrels a day,” Bournazian said. “So that extra demand is eating up that extra production, and limiting their ability to build inventories, and that’s why you see them growing at a sluggish pace.”
“Diesel demand is up 3 or 4 percent. Gas is up 1.7 percent,” he said. “Extra demand is eating up extra production and limiting the ability to rebuild inventories and that’s why we see it growing at a sluggish pace.”
Bournazian said you have this kind of situation when you’re running high demand and the industry has already finished its maintenance period and is mainly focusing on gas – maximizing gasoline production at 55 percent of the barrels of crude.
“That limits your ability to tweak your distillation process in order to do anything to increase distillate product,” Bournazian said.
Right now, we are seeing kerosene-type jet fuel reaching a very high price for airlines and diesel for truckers at record high.
“It’s pretty much going to stay that way for the summer because the only other safety valve is imports,” Bournazian predicted.
Although fuel from overseas could help, he said production there just isn’t high enough to ease our problems. Currently, diesel prices are spiking in Europe, as it’s a diesel economy and demand is up. Gasoline demand in Europe is down, so Bournazian says that’s why we are currently enjoying robust imports of gasoline.
“But you can’t expect any additional supply of diesel from Europe,” he said.
So, there appears to be no real excess supply to be bought. Bournazian said, normally, you could look around the globe to see who has extra diesel they want to unload on the U.S. market … but there isn’t really any extra production.
That’s why, he said, Americans see imports kind of dribbling along at 200,000 to 300,000 barrels a day, as opposed to gasoline imports – which come at a rate of a million barrels a day.
As long as conditions stay tight worldwide, he said there is nothing happening that will improve the diesel price situation. The United States is in a tight demand situation, as is India. Bournazian also cited China’s huge demand for diesel as another variable in the equation.
“China invested heavily for diesel electric power generators for their factories due to the fact that coal production is insufficient to meet their demands,” he said.
All of these factors explain why buyers and traders are pushed to buy up product and try to lock down prices instead of waiting for it to get better.
“Germany is a good example,” he said. “Germany laid back on purchases of No. 2 distillate during the winter because prices were high. It drew down (inventories) and waited, hoping to get a better price in the summer. It didn’t happen.”
In May and June, Germany was back to the market, making huge purchases, which pulled up prices here, Bournazian explained.
He stressed that we just can’t look at it as a problem with the U.S. market, it’s relative to the whole planet.
“When gasoline is high in the U.S., we impact the world,” he said, “because that draws gasoline imports to the U.S. because prices are high. With diesel, here’s a case where we are impacted by the world because we aren’t really a diesel market.”
Think about this. Diesel is the only major fuel for which U.S. inventories have actually shrunk in the past year. At the same time, demand for diesel increased in the United States by 6.6 percent – four times the increase in demand for gasoline.
Editor’s note: LL Senior Writer Terry Scruton contributed to the research on this subject.