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Global Market Analysis, 21 October 2022

This week's Global Market Analysis takes a look at US refined products - namely diesel and heating oil - as costs rally ahead of winter.

Diesel drawn to New York on strong demand as pipeline costs rally ahead of winter

By Jeffrey Bair

Numerous signals are pointing to diesel and heating oil getting stronger in spot markets in New York, just in time for winter and made more acute this year by the Russia-Ukraine war and the lingering effects of the pandemic.

The best indication of diesel’s strength in the East is the cost of shipping it by pipeline from Houston to New Jersey. Pipeline capacity rose 3.25 cents a gallon to a flat price of 3.25 cents per gallon Thursday, the highest cost for line space since May 23 and the first positive value since Sept. 23, according to General Index data.

General Index, NY diesel vs Houston

The number reflects the cost of going into the market to buy prompt Colonial Pipeline time to move fuel. It reflects the desire to get diesel product into the East Coast by shippers who did not book it in advance, and a higher number will lead to costlier retail prices. Gasoline line space, for example, is trading at 7.5 cents a gallon and is at its highest since late August. It is similarly desired in New York markets with CBOB gasoline blendstock trading cheaply at the Gulf Coast at the pipeline origin.

The East Coast diesel price is drawing away cargoes that were bound for Northwest Europe in a situation that has set up regions competing for fuel. European buyers are finding energy costs rising during the war.

General Index, ULSD vs Brent

Making the problem more acute is the lack of refining capacity in the US East. The pandemic sped up the decline of US refining, and more than half of the New York diesel now comes along the pipeline. The rest comes from East Coast refineries, Canada and Europe or African sources.

Another curiosity in the East: the value of heating oil shipments is starting to rival the cost of diesel. The low-sulfur versions of the products are essentially identical, with heating oil reserved as a source of warmth. Traders are still paying a healthy amount for road diesel for immediate delivery of fuel, but pipeline and barge trades three to four weeks ahead show large quantities of heating oil rivaling the cost of diesel.

The narrow gap between the two points toward expectations of a cold winter ahead and the need to secure supply for home heat in advance. Most of the rural US East depends on heating oil.

The National Weather Service in its one-month outlook this week predicted below-normal temperatures coming soon across land stretching from Ohio to Rhode Island, one of the most congested parts of the states.

Jeffrey Baird, U.S. Refined Products Pricing Director
Jeffrey Bair, Americas Refined Products Pricing Director
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