Diesel Fuel Prices Set Records

MT. JULIET, Tenn. (DTN) -- Experts say farmers should get used to paying $5 or $6 for a gallon of diesel fuel. Prices set new records this week, and they're unlikely to recede significantly before it's time to fill up combines.

On May 13, the national average retail diesel price was $5.56 per gallon, according to AAA. That's $2.42 more expensive than the average price last year.

Jason Schwantz, senior vice president of refined fuels at CHS, said Europe's pivot away from Russian fuel amid the war in Ukraine is driving up demand for U.S. exports, compounding shortages that begin with increased trucking demand in the pandemic.

Nationally, diesel inventory is 20% to 25% below the three-year average, but the regional disparities are far greater, said Brian Milne, DTN editor and energy analyst. East Coast diesel stocks are 50% below the three-year average, while Midwest inventory is only down 16%.

"I don't see this problem going away," Schwantz told DTN. "The U.S. is short diesel fuel. I don't really see diesel fuel usage slowing down, so these high diesel prices are going to be around, I think, until the fall."

Schwantz, who also farms near Plainview, Minnesota, said it's one more piece of a challenging spring planting season.

"It's getting later. Everybody's getting nervous. Everybody's getting tense. I think if you look in the Midwest, though, fuel is going to be there," he said. "I'm not going to say there won't be spot outages. Because we're compressing this spring season so tight, you're going to have a lot of demand hit all in the next two to three weeks."

Typically, planting progresses from south to north during several months, spreading fuel needs out across time. The tighter planting window does put pressure on the supply system, but Schwantz said CHS is well positioned to meet its customers' needs. "But quite frankly, prices are going to remain high."

Schwantz and Milne say there are three factors at play causing the current low stockpiles. The first is an overall decline in U.S. refining capacity. A Philadelphia refinery permanently closed in 2019 after an explosion, and negative crude oil prices in April 2020 forced others out of business. That took about 1 million barrels per day of supply off the table.

Then e-commerce took off during the pandemic, and many Americans decided they liked to get packages rather than going to stores after restrictions faded.

"Not only are you seeing more delivery vehicles, more Amazon trucks, but you also have to get supply from point A to point B before that final mile delivery," Milne said. That resulted in increased demand for trucking, which increased demand for fuel. Many warehouses also consume lots of diesel fuel.

Demand for fuel increased not just in the U.S., but around the globe, drawing down supplies.

"Clearly, the (Russian) invasion (of Ukraine) has thrown a loop in an already tight market," Milne said. Europe largely relied on Russian fuel, but objections to the war sent them hunting for new suppliers. "Starting in late February, we've seen exports of diesel really, really jump, and they're staying high."

U.S. diesel exports have topped 1 million barrels per day every week except one since March. Much of that is going out of the Gulf of Mexico. That's created a pinch on the East Coast, whose refiners primarily make gasoline and rely on pipelines from the Gulf Coast region to supply much of their diesel fuel needs.

Schwantz said refiners don't have to generate a RIN on exported diesel, which makes the arbitrage opportunity more profitable.

"What we're going to have to see for prices to come down is supply get caught up," Schwantz said. He said an end to the war would be helpful, but it won't stop Europe's shift away from Russian fuel.

"Diesel fuel is more profitable than gasoline for refiners to produce. They're going to run as hard as they can to get caught up, so to speak, but they are still seeing the pressure of exports."

Schwantz said the market is likely to be volatile, and farmers should be watching for dips in the market to fill their tanks. "Make sure they have their needs covered. There are things you can do, like CHS offers some contracting so you can get your supply locked up, so you can plan and budget. I think those will all be important for farmers."

Katie Dehlinger can be reached at katie.dehlinger@dtn.com

Follower her on Twitter at @KatieD_DTN

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