03 June 2017, New York — U.S. diesel markets are on an unusually strong footing for this time of year thanks to robust exports to Latin America and soaring demand domestically, causing traders and refiners to rethink seasonal strategies.
Diesel inventories typically start to build from April, when the weather warms and as motorists take to the roads more but this year has been different.
Distillate demand in the United States has jumped 8.3 percent from the same time a year ago, while stockpiles have fallen by more than 23 million barrels this year, the most for the first five months of the year since 2012.
The unseasonably large drop in inventories has caused refiners to maximize refinery production for diesel well into May, an unusual move as refineries by now are traditionally cranking up gasoline output, traders and market sources said.
Monroe Energy, a unit of Delta Air Lines, has ramped up production of diesel at its Trainer, Pennsylvania, refinery, specifically to fill a barge for exports, according to a source familiar with the plant’s operations.
Philadelphia Energy Solutions has shipped three cargoes of diesel to Europe in the past week, sources said. In the Gulf Coast, BP and Trafigura have been seen in the cash markets buying diesel for exports, traders and brokers said.
Refiners in the United States typically have the ability to switch some of their production between gasoline and diesel depending on profit margins and demand for the fuels.
The diesel crack spread, a key measure of margins, rose to its highest level last week since January. The gasoline crack spread premium to diesel narrowed to the smallest in nearly three years seasonally, providing further incentive to refiners to produce diesel.
“The tension between distillate and gasoline production has continued with refiners yield switching from one to the other as the market suits them,” Credit Suisse said in a note.
The note said that some, like Valero, can shift about 7 percent of their yield between gasoline and diesel, more than typical.
U.S. distillate exports exceeded 1.5 million barrels per day (b/d) in May, highest since June, while gasoline exports were less than 1 million b/d for a fourth consecutive month, said Matt Smith of New York-based Clipperdata.
U.S. consumption also has risen due to strong industrial demand and increasing freight movements. Freight movements hit a record in February, before slipping slightly in March, according to the U.S. Bureau of Transportation.
*Devika Krishna Kumar & Jarrett Renshaw; Editing: Bill Trott – Reuters
