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March 10, 2022

Increased demand and low inventories drive U.S. distillate prices higher

Daily New York Harbor nominal ultra-low sulfur diesel prices
Source: Graph by the U.S. Energy Information Administration, based on data compiled by Bloomberg L.P.

Rising crude oil prices, low refinery production, and increased consumption of distillate fuel have contributed to the highest nominal (not adjusted for inflation) distillate prices since 2014. Distillate is a category of fuel that includes diesel fuel and heating oil. The front-month futures price for ultra-low sulfur diesel (ULSD) for delivery in New York Harbor surpassed $3.00 per gallon (gal) on February 28 and closed at $4.44/gal on March 8. Rising crude oil prices account for much of the increase in ULSD prices, but other market fundamentals specific to distillate are also contributing to the higher prices.

Some factors such as increased U.S. demand, relatively low U.S. production, and low global stocks were contributing to higher ULSD prices prior to Russia’s further invasion of Ukraine.

U.S. demand for distillate fuel has been high since early 2021 because of increased demand for trucking and rail freight transport. Furthermore, cold weather in January 2022 contributed to increased demand for heating oil in the Northeast this winter, a region that relies on heating oil to heat almost 20% of its homes.

Despite increased distillate demand, refinery production of distillate remains below pre-pandemic levels, partly because of comparatively slower demand growth for other petroleum products such as motor gasoline and jet fuel.

As domestic jet fuel demand increases, refiners are shifting more of their production away from distillate to produce more jet fuel. The current dynamic of high distillate demand and low production is contributing to persistent distillate stock withdrawals in the United States. According to data in our Weekly Petroleum Status Report (WPSR), distillate stocks on the U.S. East Coast measured 31.5 million barrels on February 25, which is 37% less than the previous five-year (2017–2021) average for that time of year.

Europe and Asia are experiencing similar trends of low inventories and high prices in their distillate markets, as highlighted in our recent This Week in Petroleum analysis.

Since Russia’s further invasion of Ukraine, an additional factor contributing to higher ULSD prices, aside from increasing crude oil prices, has been the possibility of reduced distillate exports from Russia. Europe imports much of its distillate from Russia, and the possibility of reduced imports has contributed to higher European diesel prices and higher demand for U.S. distillate.

Principal contributor: Jimmy Troderman