8 Reasons To Fear Rising Diesel Fuel Prices

Oil industry analyst thinks diesel fuel could spike to 2008 levels this fall.

Published on: Jul 16, 2012

On the rumor that diesel fuel prices may be headed significantly higher, Farm Progress asked Tom Kloza, chief oil analyst for the Oil Price Information Service, for his take on the situ. Here're excerpts from his come-back:

Gasoline always commands center stage in July. But global statistics point toward trouble for the often-neglected "middle" of the petroleum barrel in the second half of 2012, says Kloza. "There's reason to believe that [diesel fuel] most likely to go 'extra-orbital' to the crude oil 'mother ship' in the next 180 days."

8 Reasons To Fear Rising Diesel Fuel Prices
8 Reasons To Fear Rising Diesel Fuel Prices

For 90 days, this product has been sleepy, but very profitable for U.S. refiners. On-the-road diesel – ultra-low-sulfur diesel, required across the country – currently fetches about $36 a barrel more than West Texas Intermediate crude and is priced about $20 a barrel above light sweet crude blends like Brent.

Even so, Kloza suggests more spectacular upside remains, particularly on the U.S. coasts. That upside could see ULSD fetch $50 a barrel or more above WTI, or even above Brent crude in the next six months.

Here are eight solid reasons for why this analyst foresees substantial upside:

  • Distillate inventories are low. U.S. stocks of 120.9-million barrels are 21-million under last year, and nearly 40-million shy of same week 2010. The International Energy Agency suggests low worldwide inventories as well.
  • Exports are up. U.S. manufactured diesel exports to Central and South America may accelerate. With no new offshore sources for U.S. diesel or jet fuel, U.S. refiners should be huge net exporters – on the order of 1-million barrels a day – for the rest of 2012.
  • Refining production losses are considerable. Autumn will see no distillate output from the shuttered Marcus Hook, Pa., refinery, and no diesel from closed refineries in the Caribbean and Europe. Delta's resurrected Trainer, Pa., refinery will contribute distillate, but significant output may not be restored there until winter. Also, the once anticipated huge contribution from Motiva's 325,000 barrel per day Port Arthur, Texas refinery expansion can be written off for most of 2012. 
  • Speculative interest in heating oil and gas oil futures heats up as the days shorten.  Financial funds have been wary of betting on higher No. 2 oil futures. OPIS believes this money will come into these contracts in the next 90 days.
  • Domestic demand is brisk – not as high as 2007. But the combination of over-the-road use, agriculture and rail needs, and barrels needed to fuel the "fracking" explosion have kept domestic deliveries nearly 4% above last year.
  • Cheap gasoline also leads to higher diesel prices. Some coastal refiners might cut overall crude runs this fall to reduce gas sold at a substantial loss. Those cuts would slice a portion of heating oil, diesel fuel, and jet fuel production as well.
  • Diesel doesn't evoke a visceral public response, so increases might go unnoticed by regulatory interests. Conversely, $4 gasoline prompts wild-eyed criticism – in an election year.
  • Most shale oil coming to market is very light, and very sweet. But that light, sweet nature leads to a higher gasoline yield and a lower yield of diesel, jet fuel and heating oil. New blends like Bakken and Eagle Ford are to some extent displacing "distillate-rich" crude blends from offshore.

What it means for agriculture?

You don't need to read between the lines. Start taking some price protection for fall fuel needs. Keep those storage tanks topped off.