GAITHERSBURG, Md. -- As many Americans geared up for the recent Presidents Day holiday weekend, retail diesel passed a big milestone. The national average fell below $2 per gallon for the first time since February 2005.
Retail gasoline prices have garnered a lot of the attention lately and rightfully so. In the last three months, the gasoline national average has been in free fall, losing 46 cents per gallon (CPG) since November. While impressive, diesel prices actually beat out their gasoline counterpart at the pump by falling 49 CPG over the same three-month stretch. If you thought low gasoline prices were killing refiners’ bottom line, plummeting diesel prices may be the straw that breaks the camel’s back.
Inventories for diesel have been quite healthy so far this year. The inventories of on-road diesel (15 ppm) in 2016 are the highest they’ve ever been. While impressive, this statistic doesn’t account for the fact that on-road diesel specifications changed in the mid-2000s to the more environmentally friendly 15-parts-per-million (ppm) sulfur content. Regardless, gasoline and crude aren’t the only commodities experiencing high inventory states.
Demand has been a challenge for diesel. Gasoline stocks have built up despite higher seasonal demand, mostly from drivers taking advantage of lower gas prices. However, the destruction of demand in a low-priced environment for diesel paints a disturbing picture of the health of the economy. Currently, distillate demand is dragging the bottom of the five-year range. Look back to 2010, when diesel prices were closer to $2.80 per gallon. The more than 80-CPG discount we are seeing now hasn’t been able to increase demand. Because a lot of diesel demand is tied to trucking, sagging demand implies a sagging state of many U.S. businesses that use trucking.
Distillate exports can’t be ignored when looking at U.S. distillate demand figures. Many U.S. refineries, especially those with water access, have been upgrading their refinery yields in recent years to include higher production of distillates. While much more can be expanded on the topic, the main idea is that this extra distillate production from U.S. refiners would be easily marketable to emerging foreign markets. So while exports remain high, the refineries have been set up to keep pushing the envelope on exports.
So if distillate exports are healthy, just how bad has U.S. diesel demand gotten despite falling prices?
If diesel prices do truly have an impact on demand, we will see in the coming weeks if rising prices make demand even worse. In the last week, word of refiners pulling back production sent shockwaves across the Midwest, Rockies and East Coast. Retail gasoline prices spiked in parts, but the production cuts are sure to affect diesel inventories and prices as well. Diesel prices are expected to rise, along with gasoline, but these low prices continue to hide the underlying issues with demand and the state of the U.S. economy.
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