Driving Discussions Downward Diesel in the USAC

US Products Associate Editor Craig Ross sits down with Jason Metko discussing the recent lowering trends in the New York Harbor and Atlantic Coast distillate markets.

Transcript

Jason: From Argus Media, this is, "Driving Discussions," a podcast series focusing on the forces affecting North American road fuels. Greetings and salutations, one and all. Jason Metko with you yet again, Associate Editor of U.S. Products here at Argus.

And on this edition of the series, we're sitting down with fellow Associate Editor, Craig Ross, focused today on the recent downward trends experienced in the diesel supply in the New York Harbor and Atlantic Coast markets. Craig, good to have you on. It's been quite a while. Good to see you yet again. Let's focus first here on, I guess, an overall snapshot of how the market's playing out, specifically stockpiles to end the first quarter.

Craig: Hey, buddy, I appreciate you having me on. It's always a pleasure to sit down and talk about the markets with you. So at the conclusion of the first quarter, just looking back over U.S. Atlantic Coast stockpiles, the last time we were together, I believe the discussion was about what the new normal was gonna look like. And as it turns out this year, the answer is the new normal looks much the same.

In the years leading up to, and including COVID, the U.S. Atlantic Coast ultra-low sulfur fuel supply, so including ultra-low sulfur diesel and off-road ultra-low sulfur heating oil, those inventories averaged between 20 and 40 million barrels from around 2018 through February of 2020, which was where we saw the massive spike in demand on the onset of the Russian invasion in Ukraine and the resulting demand increased throughout that season. But before the year was over, regional suppliers had already begun to fall.

And from 2022 all the way through the first few months of 2024, we've returned to that 20 to 40-million-barrel average month over month, week over week, according to EIA data. If we're looking at the central Atlantic specifically, so the New York Harbor and Philly area, ending stockpiles in January and February of this year are the lowest two-month average, the lowest Jan-Feb average since 2015. So, unfortunately, we're off to a fairly weak start in terms of stockpiles, again, just looking at the central Atlantic Coast inventories.

Jason: Can we pinpoint specifically what's been going on to have those stockpiles so low? Because 2015, from, I feel like, a geopolitical perspective, was kind of tame as opposed to what we've got going on now.

Craig: Absolutely. Absolutely. And overall, it's just boiling down to a lack of demand. And additionally, the drawn inventories has done very little to drive cash differentials, the differential, the premium, or the discount that trades against the NYMEX futures contract. Typically, if we see inventories go up, differentials will trade accordingly, meaning differentials will drop as demand falls due to the rise in supply. And that's just not a trend that we're seeing in the markets in recent times.

Additionally, factors such as warmer winters, certainly, over the last couple years, in both here domestically in the U.S., as well as Europe, which affects that transatlantic arb, they've been fairly mild. And so, we haven't seen the usual temperature-related demand for, you know, ultra-low sulfur heating oil, for example. We haven't seen the typical demand that we have seen in prior years. And in addition, you know, global factors now have increasingly begun to play a part. In the fourth quarter of last year, we saw some severe drought conditions in Panama and the resulting Panama Canal restrictions.

And that led to an uptick in imports into the Northeast because the Gulf Coast traders were then having to weigh additional factors, the potential for demurrage costs if they're stuck outside the canal and they can't make that voyage, or are they going to pay increased transportation costs to navigate down the southern tip of South America around the Cape Horn to take advantage of any potential arb for the west coast Latin American countries. Or, you know, in this case, looking at the relatively low inventories on the Northeast. And so, not even having to worry about the canal issues, just, you know, put barrels on a vessel and send them up to New York.

And again, looking at that movement data, the fourth quarter of last year, October, November, December, we saw three consecutive months of rising movements, rising imports from the Gulf Coast into the New York Harbor. But as the weather impacts eased in Panama and those Panama restrictions initially were forecasted to be, you know, nearly half of what they were, the restrictions that they ended up imposing weren't as severe as the initial estimates were gonna be. And imports, again, up into the Northeast have tapered off, resulting in, as we've seen now, reduced stockpiles as well.

Jason: He is Craig Ross, fellow associate editor of U.S. Products here at Argus. We are talking all things USAC-disty [SP] on this edition of "Driving Discussions." Craig, we're talking here now in the merry month of May, hard to believe. We've already scratched off four months of the calendar year of 2024. So now that we are entering Q2 from a calendar perspective, what trends are we seeing, guess over year over year? How's the state of play here in Q2, do you think?

Craig: I think current conditions are going to extend further forward. Again, just touching on those December imports into the Central Atlantic Pad 1B, you know, December diesel imports, according to Vortexa tracking data, were...hit, then, 10-month highs. And unfortunately, we've tapered for every consecutive month since.

And despite all these bullish signals that we're seeing in the regional marketplaces, receding stockpiles, reduced imports into the region, despite all of these, again, bullish signals, the general lack of diesel and ultra-low fuel demand is a trend that seems to be plaguing the East Coast markets for several months now. And looking at the market structure, it doesn't seem to be like we're seeing any immediate relief from those factors. There's very little forward curve, whether that be backwardation or contango on the differential markets, and not a whole lot of incentive for any kind of speculative trades for guys to establish a position under these conditions.

And additionally, the cash futures, which can indicate demand in the regional markets, the cash differentials for New York Harbor ultra-low sulfur diesel this year are averaging 4 cents lower than the first four months in 2023. And then combine that, the NYMEX futures is far weaker in 2024 than the same period last year. And that's resulting in outright cash prices for the same New York Harbor diesel. This year, we're averaging 18 cents below 2023 levels for the first four months of the year.

So the forecast generally seems to be continued weak demand for diesel. And the further we go into the summer driving season, I think the focus is gonna be remaining on gasoline, at least for the immediate future. And maybe by the early onset of fall, we'll see the shift towards increased diesel and ultra-low and distillate demand in general.

Jason: We'll get you out on this. Is there anything that you possibly foresee that might break this trend?

Craig: Yeah, it was an interesting time of year. Right now, we're in turnaround season. And with refinery maintenance usually comes refinery hiccups, along unplanned infrastructural setbacks. So we have seen refineries on the East Coast impact markets in recent years. And I think that will potentially impact markets again this year, if we see it. But we've got a couple of weeks away before I think that's going to be felt in the marketplace, but we shall see.

Jason: We shall see, indeed. Craig, as always, we appreciate the time, my friend. Thank you.

Craig: I appreciate it, buddy. Always a pleasure.

Jason: Craig Ross, joining us on this edition of "Driving Discussions," Associate Editor of U.S. Products. And with that, we'll conclude another edition of the series. Friendly reminder to check out the previous episodes and for all the latest and greatest in Argus' US product coverage make sure you visit argusmedia.com/us-products.

Author: Argus