Seasonal trends add pressure to distillate prices

Each year the market presents challenges and opportunities, some of which are unique to the given year and some that tend to follow a seasonal pattern. The COVD-19 pandemic is one we hope to be unique, although the effects will be long lasting.

The global pandemic caused demand for refined fuels to fall faster than production could react, as travel restrictions and social distancing became the main line of defense against the spread of the virus. The drastic imbalance of supply and demand caused prices to crater under the immense pressure of surging inventories in the U.S. and around the world.

West Texas Intermediate (WTI) crude futures rolled into 2020 at $60.63 per barrel and bottomed on April 20 at minus $40.32 per barrel. Yes, WTI crude futures traded at a negative value.

Refined products followed a similar pattern but did not free fall into negative territory. Since bottoming in spring, prices have recovered some but remain discounted to pre-COVID-19 levels. The price recovery seen thus far is a direct result of production cuts, improving demand and optimism around vaccine approvals.

With the recovery in mind, we are approaching a time of the year when cyclical forces tend to create a seasonal downtrend in distillate prices. The first force is the shift to increased distillate production versus gasoline. Distillates have a much longer shelf life because gasoline produced in the winter months has a high Reid vapor pressure (RVP) and must be consumed before the industry transitions back to lower RVP gasoline in the spring. Distillate production versus gasoline production currently exceeds the five-year average.

The second force is demand tends to weaken to the lowest level for the year around mid-January. The combination of increased production and weak demand typically sets the table for rising inventories that usually peak in the December–January time frame. Growing inventories apply downward pressure on spot and futures prices, giving end users an opportunity to fill inventories and buy future needs to hedge against upside price risk. Contact your local FS Cooperative to see how they can help lower your fuel costs and keep you within budget.

Adam Crouch serves as FS senior energy analyst.