The oil market has a diesel problem and it is not slowing down.
While U.S. crude inventories are at their lowest since April, supplies of distillates, which include diesel, fuel oil and jet fuel, continue to swell and soar to the highest level for this period of the l year in US government data going back to at least 1991. At the same time, fuel demand, often seen as an economic barometer, is at its lowest since late July.
It is a stubborn glut that presents a headache for refiners who must meet gasoline demand, but also need an outlet for the diesel that will inevitably be produced as they increase production. A lull in air travel due to the coronavirus pandemic has also resulted in a build-up of jet fuel, helping to increase supply.
The result is brutal for companies trying to make money by turning crude into gasoline and diesel. A key metric that measures the premium of diesel over West Texas Intermediate crude futures, known to traders as Diesel Crack Spread, fell to $ 6.56 a barrel after a report from the Energy Information Administration Wednesday, the lowest since June 2010.
Slipping into the crack is the “worst case scenario possible for refiners,” wrote Bob Yawger, director of the futures division at Mizuho Securities USA, in a note.
Refiners have little incentive to run their plants harder as a result of low margins and record distillate inventories. This does not bode well for crude futures contracts either.
“If they don’t increase the operating rate, they’ll never burn the overhang of crude oil that’s already in storage,” Yawger said. It’s “bearish for crude oil prices.”