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O'Neal Steel Market Informer 2022

The Diesel Market is in a Perfect Storm as Prices Surge, Supply Dwindles Ahead of Winter

A perfect storm is taking place in the diesel market, with dwindling diesel reserves, a drought on the Mississippi River pushing more product to rail and truck, and a possible rail strike leading to a surge in prices that is expected to continue. Diesel prices have increased by 33% for November deliveries. “The national average price for diesel today is $5.30 per gallon and is expected to go up 15 to 20 cents in the next few weeks,” said Andy Lipow, President of Lipow Oil Associates, LLC.

Reserves for diesel this time of year have not been this low since 1951, with the greatest shortfall in the Northeast region including New York and New England. “This is not only constricting the ability of farmers to export the soybeans and grain they grow but also to receive the fuel and fertilizer they need to operate,” said Mike Steenhoek executive director of the Soy Transportation Coalition of the low water conditions that have turned the Mississippi River from a multi-lane interstate to a two-lane highway.

“Now adding insult to injury is the increased uncertainty that railroads will be able to provide an effective lifeline during this critical time. It’s a vivid reminder that it is not enough to produce a crop or have demand for that crop. Having a reliable supply chain that connects supply with demand is also essential for farmers to be successful,” Steenhoek said.

Two rail unions recently voted down a labor deal needed to avert a national strike in the coming months.

Diesel inventories in the New York/New England markets are facing an acute crisis, down over 50% since last year and at the lowest level since 1990, according to Lipow. Lipow said East Coast refineries are making as much diesel as they can and dependent on tankers and barges for supply, any weather delay causes a terminal to run out of product. According to the EIA, East Coast refineries operated at 100% capacity in June and July. “Last week, they operated at 102% of capacity,” Lipow said. “No more supply is forthcoming from the four East Coast refineries.” New England’s diesel supply issues were made worse when a Canadian refinery in Newfoundland shut down in 2020 as the pandemic impacted on demand. The Midwest is also seeing supply constraints, pushing up costs for farmers.

“In visiting with a number of farmers, the consensus, of course, is that diesel costs are one more incursion into profitability,” Steenhoek said. “As far as getting supplies, it looks like those areas most dependent upon the river are experiencing the biggest challenge. A couple of farmers told me diesel supply via their local vendor is day to day.” In order for the Northeast to receive more diesel, the fuel needs to be imported from another country or a tanker from the Gulf Coast, but that is not allowed because of the Jones Act, also known as the Merchant Marine Act of 1920, which prohibits a foreign vessel from transporting all goods between two U.S. ports. “The Jones Act requires all cargo transported between U.S. ports be carried on ships that are U.S. flagged and built, and mostly owned and crewed by Americans,” said Captain Adil Ashiq, United States Western region executive for Marine Traffic.

According to Marine Traffic, the 55 Jones Act tankers are being used. One way to add more supply quickly is for the Department of Homeland Security to temporarily waive the act for foreign vessels to move the fuel.

Source: CNBC, 10.30.2022

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