Everybody, start your engines because the race is on. The two racers are: Supply and demand, (disguised as low inventories), versus the economy. There aren’t any cars in this race though, only diesel-powered trucks.

The problem right now is, you can’t start your engines if you can’t find the fuel, and even if you find it, you can’t afford it!

A key factor here is: it’s diesel that drives the economy, not gasoline.

The inventory situation for U.S. distillates (diesel, heating oil, and jet fuel) have now reached critically low levels.

U.S. inventories sit at 107 million barrels, which is the lowest ever recorded for this time of the year, that being the heating oil season, and winter is officially just a month away.

The situation is particularly bad in the U.S. Northeast to the point where there is pressure being applied to access the area’s Home Heating Reserve, which only holds a 10-day supply. Total U.S. distillate inventories are 15% below the 5-year average. Nationally, refineries are struggling to keep the tanks topped up even while running at 93% capacity. Note in the U.S. Northeast (where heating oil is still the home heating fuel of choice), that refineries are running at 2% over design capacity. This means that distillates will have to be imported to meet demand.

These imports will have to be the cargoes originally scheduled for Europe and redirected to the U.S. where prices are more attractive. This, of course, means higher domestic wholesale prices and end user consumer costs.

Nothing like higher food prices at the start a possible recession.

Things could get worse as the EU will trigger their embargo on Russian crude imports on December 3. Then in the dead of winter, in February, they will also sanction all Russian refined product imports including all distillates.

This will generate a bidding war as the EU will be desperate for non-Russian crude and all refined products; and the U.S. and other suppliers will follow the money.

If you think diesel prices are high now, here’s a thought: have another think!

– Roger McKnight – B.Sc., Senior Petroleum Analyst

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