Distillate stocks in the Midwest are in much better shape heading into harvest than they were leading up to spring planting.
Data provided by the U.S. Energy Information Administration for the week of Sept. 10 show ultra-low sulfur diesel inventories are about 6 million barrels higher than where stocks were in March. Last spring, a combination of low inventories and unplanned refinery disruptions led to a volatile distillate cash market, where prices jumped more than 30 cents in parts of the Midwest in about two weeks. Those that had full tanks and pre-buy gallons insulated their input costs against the price jump.
Specifically looking at the fall period when demand is high, refinery maintenance and hurricanes are the two main factors that lead to decreased production and add upside price risk. Planned maintenance is scheduled for this time of year because the market transitions from the more expensive to produce summer-blend gasoline, to the cheaper to produce winter-blend gasoline. To do this, refiners take down units to retool. In addition to planned maintenance, unplanned maintenance is a risk the market faces year-round, and the effect multiplies during times of high demand and low supply. Hurricanes are the other factor that can lead to decreased production. Nearly 50% of the U.S. refining capacity is in the Gulf Coast, and the Midwest often relies on resupply from the Gulf Coast during periods of high demand and low supply, like last spring. Flooding and power outages are typical side effects of hurricanes that often lead to prolonged downtime, ultimately supporting the price of resupply.
Currently, the fall distillate cash market doesn’t appear to be shaping up to be as volatile as the spring. However, we are not in the clear. There is plenty of harvest demand remaining, hurricane season runs through the end of November and maintenance season is ongoing. Please get in touch with your local FS to discuss any keep full or pre-buy programs to help ensure price stability for your operations.