Analysis: U.S. Diesel Export Ban Won't Bring Price Relief


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- Washington's consideration of a diesel export ban to tame 
rapidly rising prices risks turning a global supply shock into a self-inflicted 
domestic squeeze, as restricting overseas sales could push up prices 
immediately and later discourage refinery production, leaving U.S. consumers 
with little lasting relief.

   Retail diesel prices in the U.S. have continued to appreciate rapidly, with 
the national average last week soaring to an unprecedented $6.529 gallon, up 
more than $0.24 gallon from just a week earlier, according to Energy 
Information Administration (EIA) data published Tuesday (9/23). These 
record-highs, however, are the result of supply tightness of a globally priced 
and traded commodity, and do not stem from a domestic supply shortage.

   In fact, the U.S. is sitting on a sizeable diesel surplus. According to EIA 
data, domestic diesel production has averaged over 5.2 million bpd over the 
last four weeks, compared to consumption of 3.6 million bpd. While this 
imbalance can in part be attributed to the combination of seasonally low demand 
and exorbitant margins for middle distillates, a diesel overhang is built into 
the system.

    Averaged over the year, domestic supply still outpaces demand by 1.1 
million bpd, EIA data showed.

   This diesel surplus is no fluke, but the result of U.S. fuel demand 
realities and refining fundamentals.

   In contrast to the European car fleet, personal transportation in the U.S. 
overwhelmingly runs on gasoline. This translates into roughly 2.5 times higher 
demand for gasoline than for diesel. Domestic refiners must process enough 
crude oil to meet this gasoline demand and given the approximate 1.5-2:1 
gasoline to diesel yield ratio, the market consequently ends up with excess 
diesel which makes its way to international buyers.

   In absence of an export outlet, refiners would be incentivized to run at far 
lower rates than they have been, especially in the current environment of 
record-high diesel cracks and the outsized profitability of products from the 
middle of the barrel compared to lighter ones like gasoline.

   Lower runs, in turn, mean less supply of all types of fuels, rendering them 
more expensive. A diesel export ban, therefore, is not only unlikely to improve 
the domestic supply-demand balance, but is guaranteed to raise prices for most 
other refined products.

   Global context

   A ban on diesel exports fails to address the structural reasons behind 
sky-high domestic prices: short international supply, and buyers willing to pay 
large premiums to get the fuel to where it's actually needed. International 
diesel prices have over the past four years been supported by the effects of 
large-scale sanctions on Russian oil and product exports, which constrained 
supply and, more importantly, necessitated an expensive rearrangement of trade 
flows.

   On top of this, the world is now facing a diesel drought that is largely the 
result of a more than six-month long war in the Middle East that has led to 
crude-shortage induced refining lulls, shut-in product flows from the Persian 
Gulf and refining capacity destruction.

   On the contrary, an export ban may even initially push prices higher, given 
that retail prices everywhere are closely connected to futures contracts 
reflective of global supply-demand dispositions and product availability.

    Even after this initial spike, any price relief at the pump may be 
short-lived, as refiners would be forced to throttle production in the absence 
of access to the export market. The situation is even worse for 
import-dependent regions of the U.S., where tightening global availability 
stemming from a U.S. export ban could easily have the opposite effect from the 
one intended.

   
 




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