Inventory and Recessionary Concerns Drive Prices

September 27, 2022

Written By Tim Danze

Two forces opposing market forces—low inventories and recessionary concerns—are battling to determine the direction of diesel fuel prices in the near term. From a supply standpoint, total distillate inventories stood at 116.020 million gallons as of the week of Sept. 9., 2022. At the same time last year, there were 131.897 million barrels, so we are down about 15.877 million barrels year-over-year. The current level is down 33 million barrels from the three-year average. If there is any semblance of normal demand, these supply levels will certainly present challenges. There are a couple of possibilities that could help this situation. Either prices stay high and create demand destruction or a recession that hurts demand sets in. Of course, it could be argued that inventories have been below the three-year average low for all of 2022, and the market has made it this far and could continue to squeak by as it has.

Gasoline is in a similar situation, with total inventories at 213.040 million barrels—a 5.102-million-barrel deficit compared to this date in 2021 and a 13.410-million-barrel deficit below the three-year average.

As is always the case with these markets, many things can and will influence the direction prices move. I believe that the factors mentioned above are key, but there is still an ongoing war that many of us have pushed to the backburner. Russian President Vladimir Putin could create turmoil in Europe if he limits natural gas supplies, which would have a ripple effect across energy markets. Putin’s tactics already have created more demand for distillates as European countries have been buying more diesel as an alternative to natural gas in case Russia cuts off supplies. Another factor that could support prices in the longer term is the December deadline for Europe to ban the purchase of Russian oil. At this time, it is still a question of whether the EU can pull this off, but it is another item that could increase the purchase of crude oil and distillate supplies and support prices.

Futures for ultra-low sulfur diesel on the New York Mercantile Exchange hit their high for the past year in September 2021 at $5.85 per gallon, while the recent low for October 2022 is $3.15 per gallon—a drop of $2.70 per gallon. Prices have come down despite all the bullish fundamentals, so it’s fair to wonder if prices were too high. Was the market overdone to the upside because of war fears? Prices could continue to trend lower, but it might take a worsening economy and demand destruction to make it happen. All this market needs to derail more downside is a hurricane that hits refinery row in Texas and Louisiana or a resilient economy that just keeps rocking along despite higher interest rates.

On the propane front, total U.S. inventories stood at 70.816 million barrels as of Sept. 9, an increase of 7.062 million from last year at that time. This is encouraging, but the three-year average is 82.813 million barrels for this point in the year, so inventories are still lagging recent trends. Midwest inventories stood at 22.800 million barrels, down 1.243 million from last year’s level of 24.043 million barrels. Inventories at the Gulf Coast are up 9.912 million barrels from the previous year. This is an acceptable level, but with the Russian invasion of Ukraine and bans on buying Russian energy, propane exports have been strong from American producers. If natural gas supplies for Europe get cut off this winter, that will increase exports of U.S. propane and dimmish our inventory. There are still plenty of upside risks for propane this winter.