Distillate prices becoming brutal

Trader’s Corner, a weekly partnership with Cost Management Solutions, analyzes propane supply and pricing trends. This week, Mark Rachal, director of research and publications, explains the catalyst behind the meteoric rise in distillate prices.

Catch up on last week’s Trader’s Corner here: Noticeable jump in ready-for-sale propane inventories

On July 24, WTI crude closed at $89.31, down $2.88 per barrel, or 3.12 percent. It was a welcome relief from the rapid rise in crude’s price since the ceasefire between the United States and Iran fell apart. The price of distillates, which include diesel and heating oil, fell even more, with a 3.71 percent drop. But that was little consolation for the consumers of distillates. The price at New York Harbor was still $4.1806 per gallon.

The impacts of the U.S.-Iran war on distillate pricing have been particularly bullish. Before the war, there was already upward pressure on distillate prices because of another war. Ukraine is trying to bring Russia to the negotiating table by attacking its energy infrastructure. It has been successful in hitting Russia’s refiners. That has caused a shortage in Russia and brought its distillates exports to a standstill.

China is a major exporter of distillates in Asia. The U.S.-Iran war has made crude supply to China uncertain and more costly. In response, China cut its exports. The combination has been brutal for distillate consumers.

Propane buyers have been hit with upward pressure on prices since the military action in Iran resumed. But propane was already a low-cost Btu, and it has stayed under control during this latest round of fighting. In fact, propane has become even cheaper relative to crude and refined fuels. Distillates have more Btu per gallon than propane, so to get a true comparison, we need to convert the distillate price to a propane Btu equivalent. Propane closed at 74 cents per gallon at Mont Belvieu on July 24, while distillates were at the equivalent of $2.76 per gallon of propane.

High prices are hurting demand. Demand is choppy, so we focus on the trendlines. The red line is this year. Prior to the U.S.-Iran war, distillate demand was above last year and the five-year average, but the trend is bearish now. That is a bad sign for the U.S. economy.

With the world short of distillates, the United States is exporting more.

The United States exported 1.604 million barrels of distillates last week. So far this year, the average weekly export rate has been 1.416 million barrels per day (bpd) compared to 1.253 million bpd over the same period last year. Meanwhile, imports have averaged 169,000 bpd this year. They were at 173,000 last week, meaning the United States exported 1.431 million bpd more distillates than it imported.

The result is low U.S. distillate inventories.

Distillate inventories have set new five-year lows for much of the summer. They have been recovering lately, which is typical for this time of year. However, there is no doubt that the higher prices and lower domestic demand are helping with inventories despite the export pressure.

Some propane dealers are also heating oil distributors. We can only imagine the difference in conversations with the consumers of these two products. If you are a heating oil dealer, you can hedge the cost of supply using swaps just like we discussed for propane. Many propane dealers may also be using diesel for fuel in their bobtails and service trucks. Traders will do small enough volumes on distillate/diesel hedges to allow a propane/heating oil retailer to hedge their own fuel costs.

Chart 5 shows distillate/diesel/heating oil futures prices. The price is not great for futures. The May 2027 price was about a dollar per gallon less than the August front-month price on Friday. The price drops even more as you go further out, getting to about $1.50 per gallon below the current price.

Again, though the prices aren’t great, there may be a number that you could be happy with in the future. It might be nice to know your worst case for some or all of your own diesel demand. And sellers of heating oil should watch this futures curve for opportunities to lock down the product they will sell at an acceptable price. We provide this curve along with propane, crude and natural gas futures curves in our daily report.

Charts courtesy of Cost Management Solutions.

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