Argus Media Limited

12/26/2023 | News release | Distributed by Public on 12/26/2023 12:18

point: ULSD may rally in next fall season

Southern US midcontinent diesel prices may rally during next year's fall harvest season as potential changes to regional gasoline specifications could reduce the region's production capacity for diesel production.

Eight US midcontinent states - Illinois, Iowa, Minnesota, Missouri, Nebraska, Ohio, South Dakota and Wisconsin - filed a petition to rescind the longstanding Reid vapor pressure (RVP) waiver for 10pc ethanol in gasoline, which would lead to the reformulation of the blendstocks used to produce both 10pc and 15pc blends.

The US Environmental Protection Agency (EPA) in March this year proposed approving the request from the eight states with an effective date of 28 April 2024, but the EPAhas not made a final official ruling.

The potential gasoline shift could increase gasoline output while reducing diesel production. Additionally, the shift could create difficulties for pipelines transporting supplies of diesel throughout the region, Magellan pipeline recently said in a petition to the EPA.

Any cuts to diesel output would weigh most heavily during the region's spring planting and fall harvest seasons as agricultural activity - a driver of diesel demand - ramps higher. During this past harvest season, cash differentials for ultra-low sulphur diesel (ULSD) in Group Three, which supplies much of the Great Plains region, reached an 18-year high on 20 October at 104.75ยข/USG above the November ULSD Nymex. Outright prices for ULSD in the region peaked at $4.20/USG that day, then the highest price since 24 October 2022, when a similar rise in cash differentials prompted by supply issues occurred in the region.

On paper, the arbitrage opportunity to send ULSD to the Great Plains from the US Gulf coast reached an all-time high on 20 October, with Group Three fetching a $1.17/USGpremium to US Gulf coast ULSD.

Harvest season in the US midcontinent typically begins in the middle of September, with demand to fuel farm equipment often beginning to increase in August. ULSD demand typically buoys increased diesel shipments on Magellan and Explorer pipelines from the US Gulf coast.

The corn harvest, a driver of midcontinent ULSD demand, was 2 percentage points higher in the US at 45pc completion in the week ended 15 October compared with a year earlier and 3 percentage points higher than the five-year average for the week, which stands at 42pc, according to data from US Department of Agriculture (USDA).

The southern US midcontinent increased its supply of diesel from the US Gulf coast, increasing the region's intake from pipeline by 181,000 b/d to 2.17mn b/d in September from the previous month, according to the latest data from the Energy Information Administration (EIA). This was down by 443,000 b/d from the same month in 2022.

During the month of October, unconfirmed pipeline shipping disruptions to Group Three may have pinched prompt inventories, market participants said. A major pipeline may have experienced pauses in deliveries of ULSD to Group Three, sources said, and outright ULSD prices rose sharply. Similar inventory draws may occur in October 2024 as the harvest season peaks.

But some market participants say the market may develop differently. Spreads between Group Three ULSD and US Gulf coast ULSD are narrowing, with cash flipping to contango, where forward prices are higher than prompt prices, in several regions, according to a market participant. If the market flips to contango during harvest season, price volatility could be subdued compared with 2022 and 2023, as buyers would seek next year to purchase ULSD and store it.

Other factors will also play into diesel demand during next year's planting seasons. The average seasonal precipitation outlook for the months of March through April shows that the southern midcontinent could see above average levels of rain fall, according to official forecasts from the National Weather Service. Increased rainfall could delay the start of planting, which in turn could push back the start of the harvest season.

By Hunter Fite and Zach Appel