Analysis: Federal Diesel Measures, Temporary Relief Only


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- Recent U.S. federal measures to boost diesel supplies are 
likely to offer only temporary relief rather than resolve the ongoing domestic 
shortage.

   The U.S. Department of Energy on Wednesday (10/21) announced the release of 
315,000 bbl of heating oil from strategic reserves in the latest supply-side 
measure by the executive branch aimed at taming sky-high diesel prices. Like 
the White House's recently struck deal with the Kremlin to purchase diesel from 
Russia, however, this marginal bump in supply is dwarfed by the size of the 
physical market imbalance.

   Deliveries of about a third of the roughly one million bbl of 
heating-oil-designated ultra-low sulfur diesel held in the Northeast Home 
Heating Oil Reserve are set to be completed over the next three weeks and will 
come in the form of loan outs.

   Given the magnitude of the global diesel supply shortage and depleted 
commercial inventories, the release of less than two hours' worth of national 
diesel consumption is unlikely to significantly move the needle.

   The International Energy Agency in its latest monthly oil market report 
pegged the global diesel supply deficit at 1.7 million bpd in the third 
quarter, up from 1.5 million bpd in the second quarter.

   New England diesel and heating oil stocks have been hovering around half of 
typical levels for most of the year and are currently still near the 
multi-decade low reached at the end of August.

   Moreover, inventories along the entire East Coast have continuously declined 
throughout the year, leaving the region without an opportunity to restock ahead 
of winter. Diesel stocks typically expand between Memorial and Labor Day, a 
period coinciding with peak refining activity and seasonally lower diesel 
demand, with stockpiles consequently growing by about 25% on average during 
this 3.5-month period.

   Amid a tightening global diesel market this year, however, East Coast 
distillate fuel oil stockpiles instead shrank by 10% during that time.

   Latest U.S. Energy Information Administration Data show that commercial 
inventories in the region are currently just above 21 million bbl, compared to 
the five-year seasonal average of 29.71 million bbl.

   The planned emergency reserve release, aside from representing a rounding 
error measured against the current diesel supply deficit, is not even 
guaranteed to help lift New England diesel stocks from their all-time seasonal 
lows, as tight market conditions discourage storage. 

   Additionally, the volume in question, while close to 13% of current 
inventory levels, is only a fraction of the more than 2 million bbl needed to 
restock to normal levels ahead of winter.

   First Russian Cargo

   The U.S. East Coast, meanwhile, is awaiting the first delivery of Russian 
diesel in more than four years. Given the average voyage time between the 
Baltic Sea and New York Harbor, the first Russian diesel cargo bound for the 
U.S. since the White House waived sanctions on the country and the Kremlin in 
return lifted its diesel export ban is expected to arrive two weeks from now. 
The 300,000 bbl are part of the 2.25 million bbl of diesel that Russia 
committed to supplying to the global market in October.

   Russia meeting the lofty export targets set for November and December of 4.5 
million bbl and 9 million bbl, respectively, would indeed provide some respite 
to a tight market. The prospects of Russian diesel exports returning to normal 
levels by year-end, however, are more than dim. Ukrainian attacks on Russian 
downstream infrastructure have by now knocked out more than half of the 
country's refining capacity. Costly and time-consuming repairs are unlikely to 
be completed in short order, especially considering currently low chances of an 
imminent ceasefire. In fact, refiners may even be purposefully holding back on 
repair work given the security situation, as several plants were again struck 
and damaged within weeks of reemerging from a prior attack.

   Reports this week suggested that Rosneft, owner of around a third of Russian 
refining capacity, has been pumping the maintenance brakes at its plants and 
is, bar political pressure, likely to continue to do so until the threat to 
refining infrastructure eases.

   Given these factors, the federal supply-side measures taken over recent 
weeks are likely to be little more than a band-aid on a flesh wound.

   Setting aside unpopular measures to curb demand, the most effective way for 
the government to ease the burden on consumers and businesses is to tackle the 
core reason for the supply deficit. However, considering growing signs pointing 
to an escalation in fighting after the midterm elections, this may remain a 
rather unlikely proposition.




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