Viewpoint: Seasonal diesel spikes unlikely this winter
Houston, 9 August (Argus) — Ultra-low sulphur diesel (ULSD) price spikes in the US northeast are unlikely this winter despite forecasts of lower temperatures, as last year's mild winter left plentiful supplies in the region.
Suppliers typically secure volumes of ultra-low sulphur diesel (ULSD) containing maximum 15ppm sulphur near the end of summer for home heating in the northeast, the largest regional consumer of heating oil in the US. But two consecutive warm winters has left a supply overhang that the market is still struggling with.
The 2015/2016 and 2016/2017 winters were the warmest on record since 1950, according to Commodity Weather Group. This cut home heating demand and caused stockpiles to build.
Inventories of ULSD in the northeast region of the US ended March 2017 at 33.8mn bl, more than three times the volume at the end of March, 2015, data from the US Energy Information Administration show. ULSD is the main blendstock for home heating oil in the 11 state region of the US northeast, PADDs 1A and PADDs 1B, where sulphur limits have become increasingly stringent over the years.
End user suppliers were heard to have secured volumes of ULSD in June and July, when the contango in the ULSD forward curve was wide. But the volumes were heard to be conservative compared with previous years on fears of another warm winter. By early August, the forward curve had flattened enough to discourage stock building. Inventories of ULSD at the northeastern part of the US currently stand at 33.5mn bl.
The upcoming winter, December through February, is expected to be warmer than the 30-year average, but colder than last winter, according to Commodity Weather Group. Forecasters also expect October to be cooler than last year. A colder winter compared to last year is unlikely to cause price spikes, but if the Gulf coast export markets ramp up during the winter, it could limit volumes available for the northeast.
ULSD exports from the Gulf coast have had the greatest impact ever on northeast prices for two reasons: starting in July Colonial pipeline was shipping under capacity for the first time in five years; and ULSD is becoming the main blendstock for heating oil, as opposed to higher sulphur fuels.
Colonial's main distillates line fell out of allocation in July, when some shippers decided to let their shipping history go at the expense of future nominations. This means the amount of distillates moving on the pipeline from the Gulf coast to the northeast is aligning with the arbitrage more closely than ever. Distillate exports to Latin America and Europe have dominated the US Gulf coast markets in recent years and directly impact the domestic arbitrage to the northeast.
In 2018, the majority of the northeast states will require all home heating oil to have a sulphur specification of no more than 15ppm, continuing rule changes that began in 2012. This has led to refinery upgrades and reconfigurations and a subsequent drop in high-sulphur heating oil production. Instead, the home heating market is competing directly with the on-road diesel market.