Lowest Diesel Inventories Since 1951

Diesel fuel is currently priced at about its level that prevailed when crude was well over $100 per barrel. Diesel permeates the transportation network for goods, particularly foodstuffs; ditto for construction and farming; and home heating oil is a primary heat source in various parts of the country. The onset of winter could precipitate outright shortages of diesel and even higher prices. Consider that existing stockpiles represent only 25 days’ supply, and the current level is the lowest ever recorded for this time of year. Because most food and grocery items are transported via truck, cost structures will remain troubling and limit relief for consumers.

Facts and figures. Currently, the U.S. has just 106 million barrels of diesel and heating oil in commercial stocks; the last time inventories were that low in mid-October was in 1951, when Democrat Harry Truman was in the White House. Typically, inventories should be 30% higher this time of the year.

Wholesale diesel prices in the spot market of New York harbor, a key pricing point, surged this past week to more than $200 per barrel. Bloomberg notes that excluding a three-week period from late April into mid-May, that would be a record high. Result: American refiners have the best-ever diesel margins, with the profit of turning a barrel of crude into one of diesel hitting a record high of $86.5 per barrel, up about 450% from the 2000-2020 average of $15.7 per barrel.

President Biden will have a ready and often-used excuse for the surge in prices: Russia. The U.S. was importing a significant amount of Russian fuel oil before the war, which its Gulf of Mexico-based refiners turned into diesel. The trade ended after the White House sanctioned Russian petroleum exports.

White House has limited options. It intervenes, they could release a small reserve of diesel that the government keeps for emergencies. The Northeast Home Heating Oil Reserve only has one million barrels. That’s not much. Releasing more crude from the Strategic Petroleum Reserve would do little to resolve the problem, since the bottleneck is refining.

A sensitive White House option: restrict or even ban diesel exports. If that move is taken, it will not please Mexico, Brazil and Chile who are short of diesel. In July, the last month with available full data, U.S. diesel exports to Latin America hit a record high of 1.2 million barrels, double the amount a decade ago.

Another option: Force oil companies to build up stocks quickly ahead of the winter by setting a minimum inventory level, similar to what the European Union did for natural gas stockpiles. Problem again is that this would lead to surging prices in Latin America as it would force American refiners to import more or reduce their exports — or both.