The fuel usually costs less than gasoline in the summer, but supply is down this year as refiners reduce production
Gasoline prices are set to follow sliding crude oil values down over the next year, but diesel prices may actually increase over the next few months.
Susan Bell of IHS Markit said diesel supplies generally increase in summer because it’s easier for oil refiners to produce summer fuel compared to low-flow winter diesel, which has more restrictive specifications in terms of the components that can be added to it.
This increased supply generally softens diesel prices just as the winter heating season wraps up, Bell said.
Until last summer, diesel values would usually fall below gasoline prices in summer, but that is unlikely to happen this year for an extended period of time.
“We’ve really seen an awful lot of weakness in the gasoline supply-demand fundamentals, and what’s happened is refiners, particularly in the eastern portion of the U.S., have cut runs,” Bell said.
“That has really tightened up diesel balances because when a refinery cuts crude runs they are not only cutting gasoline production, they are also cutting diesel production.”
She said the U.S. Midwest, particularly the Chicago market, has a tight distillate supply and that supports diesel prices relative to crude oil.
“The diesel fundamentals are much stronger and supporting prices and we do expect that to continue through the year. We do see there is a fair risk to gasoline prices from the refiners perspectives and that gasoline prices are going to soften more than they already have,” Bell said.
“But we don’t see the same fundamentals when it comes to diesel prices. We do expect diesel prices to be quite resilient in this market, even though crude oil prices are dropping.”
She said fears of a global economic slowdown have world benchmarks softening, including those for crude oil.
Canada has experienced strong diesel demand over the past couple of years on firm growth in the county’s gross domestic product.
However, “we’re not really seeing strengthening GDP growth anymore. The economy has really softened, not just in Canada but globally the economy has softened,” Bell said.
“We do see that 2019 diesel demand in Western Canada is going to be slightly softer than what we saw in 2018. There are some fundamentals there that are pushing demand down. The key one is we’ve lost out on crude-by-rail economics with the Alberta curtailment.”
The Alberta government mandated oil production cuts at the start of the year in hopes the reduced supply would increase prices for oil produced in Western Canada. It has since cut back on the production restrictions.
Bell said that helped and oil production volumes should start to rise. However, it’s unlikely it will be as high as last year.
Bell’s longer-term outlook is for a softening of diesel demand, which should translate into lower diesel prices.
However, her short- to medium-term outlook is for tight diesel supplies to keep prices high, especially compared to crude and gasoline.
Dan McTeague, senior petroleum analysis at Gas Buddy, said he sees crude oil and gasoline prices declining because of reduced global demand over the remainder of the year.
He said trade tensions between the United States and China loom large.
“There is a sense the global economy will slow down with some nations tipping into recession as the result of these two nations involved in quite the trade donnybrook.”
But McTeague also sees tightening diesel supplies inflating prices in the near term and increasing diesel differentials compared to crude.
He said a major factor in the increased diesel prices relative to crude is the International Maritime Organization (IMO) bunker fuel specification that goes into effect in January 2020.
Current specifications allow ships to run high sulfur bunker oil, which is widely available around the world.
As of January, bunker fuel must meet the new IMO low sulfur specification.
“We think the reaction the industry is going to take is they are going to stop blending the high sulfur residue into the bunker pool and substitute in low sulfur vacuum gas oil and low sulfur heavy distillates to try and meet the volumetric demand for the fuel,” Bell said.
She said this means there is going to be a surplus of heavy residual, and there is going to be a shortage of distillate barrels in the market.
“That’s going to result in refineries having to increase their crude run to meet the incremental demand for the distillate. That incremental demand for distillate is quite high — globally we’re expecting it to be over a million barrels a day of incremental distillate demand, which is substantial,” Bell said.
She said this will likely increase diesel prices relative to crude oil, which should begin in August or September of this year as the industry tries to change out its stocks in its tanks.
“The whole diesel complex in North America will strengthen, just in time for harvest season,” Bell said.
She said the North American agricultural harvest season has a more pronounced effect on diesel supply than does planting season.
“Spring doesn’t seem to be as big of a demand bump as the fall harvest season. I think that is because the fall harvest season is a much more concentrated period of time for all of the farmers to be out there harvesting, and that’s where we see a strong demand bump that would increase prices,” Bell said.
McTeague said the delayed planting in the United States because of wet conditions could cause diesel prices to rise as soon as July.
Jason Parent of the Kent Group said farmers should keep an eye on where the loonie is compared tothe U.S dollar because when the loonie sinks, prices for all fuels go up in Canada.
Parent said it’s tricky to tell people when they should buy fuel, but it is likely a good idea for farmers to stock up on diesel now before prices increase.
“Generally speaking, this time of year is when you see diesel prices mellow out a little bit, and you’ll see them start to rise again in the fall as we get later into the summer and into the fall.”
Agriculture is exempt from the carbon tax, but in terms of how the tax is affecting overall prices, Bell said gasoline demand is much more price responsive than diesel demand, which is tied more to industrial use and transportation.
However, she said the carbon tax at its current level isn’t likely significant enough to lessen demand for gasoline.