Viewpoint: NYH ULSD supply remains tight into 2023

Atlantic coast diesel prices have retreated from record highs seen earlier in the year from conflict-fueled supply constraints and a resulting surge in Nymex futures, but uncertainty persists going into 2023 with supplies far below seasonal norms.

The spring of 2022 saw Atlantic coast ultra-low sulphur diesel (ULSD) reach historic highs at $5.35/USG on 28 April, the same day heating oil futures closed at record highs of $5.14/USG. East coast stockpiles of distillate fuel oil for the corresponding week ending 29 April fell to then 32-year lows at under 22.4mn bl, before continuing to as low as 21.97mn bl the following month, according to data from the Energy Information Administration (EIA).

Regional supply constraints resulted in cash differentials that trade against the corresponding futures contract soaring as high as $1.25¢/USG over the Nymex basis this year. This created steep backwardation which in turn reduced market participants' desire to shore up stockpiles due to the elevated costs.

The Colonial diesel arbitrage from the US Gulf coast to the northeast shrank after reaching record highs of 132.44¢/USG in early November, although levels remained open on paper during the first half of December. Diesel prices in the Northeast for 1-15 December were 12.44¢/USG above the cost of Gulf coast diesel and 5.86¢/USG over the costs of the Colonial pipeline tarrif.

The Russia-Ukraine war has fueled diesel and gasoil shortages throughout Europe, and imports to the region have absorbed a higher market share from US markets. Tanker clean freight rates from Europe to the US Atlantic coast hit two-year highs at $57.43/t in early December, hampering movements in an already tight supply chain. Imports of distillate fuel oil into the east coast during the first two-weeks of December reached nine-month highs at an average of around 262,000 b/d, according to EIA data. Despite increased imports over the period, flows are over 19pc below the same period last year.

The early winter season in the US has been warmer than usual, prompting diesel and heating oil markets to decline in the northeast during the first half of December. Ultra-low sulphur heating oil (ULSH) differentials in New York averaged around -19¢/USG versus the Nymex futures during the first half of December this year. Levels are over 6¢/USG below the same period last year, although temperatures are expected to drop as the season progresses, raising the prospect of higher diesel and heating oil prices.

By Craig Ross