Diesel price relief not expected in the short term

In the last month, diesel prices have begun to rebound with a slight drop in prices.

However, that is not a trend likely to continue in the near future.

On April 12, the Energy Information Administration released a summer fuels outlook as part of its short-term energy outlook.  Despite the recent drop in diesel prices, EIA anticipates summer prices not seen in nearly a decade.

Economic recovery from COVID-19 and increased levels of geopolitical risk have driven up petroleum market prices, EIA said. In addition diesel consumption is expected to equal the summer of 2019.

EIA is not the only entity expecting a diesel price surge this summer.

Tom Kloza, global head of energy analysis for market analyst company OPIS, agreed that the next few months could be tough for diesel consumers.

“The market has been so volatile this year, it’s the craziest sort of backdrop I’ve seen,” Kloza said. “When you’re looking at refined products, diesel has the most upside as long as we continue to grow. But, it also has the most downside if we enter a recession.”

Global shortages of diesel are possible this year, said Kloza, who’s covered oil markets for more than 40 years.

In Europe and Asia where natural gas is more expensive than diesel, industries like power plants could begin using diesel as a fuel source, further driving up the demand and cost. Add to this, the recent decision of some U.S. refineries to adjust operations.

“This week we’ve seen U.S. refineries tweak their operations,” Kloza said. “The most profitable thing they can make right now is jet fuel, and that is manufactured to a certain extent at the expense of diesel. Everything is on the table. I think there’s going to be a lot of drama and it’s going to be expensive drama.”

The historic release from the strategic petroleum reserve announced by the White House in March did mitigate crude oil prices somewhat. A marked increase in oil and gas production by the U.S. is also expected.

However, with demand so high in international markets the U.S. also is exporting diesel at record rates, Kloza said.

“Last week was a record for export products,” Kloza said. “Refineries are doing so well because they are exporting. Particularly Gulf Coast-sourced diesel due to demand in Latin America and Europe. Of all the different prices, the one that has he most of an excuse to rise is probably diesel.”

Similar to the Gulf Coast, refineries on the East Coast are benefiting from international markets as well as proximity to local refineries. This also keeps regional prices lower compared to the West Coast.

“The highest prices for crude oil have occurred or will occur in the next 100 days,” Kloza said. “Washington (D.C.) is going to be looking at doing things to mitigate the high prices. Bottom line is, it’s going to be a very expensive year. The other thing I suspect you’ll see is dramatic price differentials in diesel between the western states and the rest of the country.”

With ongoing uncertainty, including fear that more Russian oil will be repressed, the fuel market in the short term will maintain the trend of unpredictability.

“It’s chaotic,” Kloza said. “Probably the only analog would be the early 1970s. This market, which is bipolar, has gone back to the manic phase.” LL