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Energy Analyst - KC Energy
Global oil stocks have fallen by 509 million barrels over seven months, according to International Energy Agency figures, and diesel remains one of the tightest corners of the fuel market. Heating oil supply stays exposed to a single refinery outage because refiners are already running at very high rates and producing as much diesel as they can. Heating oil demand on the U.S. East Coast adds to the pull on refinery output. An unplanned shutdown at one plant lands on a market with little room to absorb it.
Alex Hodes, StoneX Director Energy Market Strategy, covers crude oil, refined products and the supply flows, inventories and refinery run rates that move them. That coverage gives insight into what is driving heating oil and diesel supply, from refinery run rates to the crude grades refiners can access.
U.S. refiners are pushing diesel output as high as their crude allows, driven by refining margins that have stayed high. Hodes notes that "they are actually already maximizing this diesel output because those refining margins have been so elevated." Heating oil demand arrives on top of a refining system already running at full stretch. As a result, heating oil and diesel buyers are drawing on barrels that refiners cannot easily add.
The U.S. East Coast is where heating oil demand concentrates, which shapes how U.S. refiners set their product mix as colder months approach. Specifically, refiners respond to that demand by tilting output further toward diesel. Refining margins have started to come down a little, yet heating oil demand keeps U.S. refiners focused on the diesel cut. According to Hodes, "you're going to see some of those refiners maximize that diesel cut as much as they possibly can."
Refiners cannot turn every barrel into diesel, because the crude oil grades available to them set a ceiling on diesel yields. Hodes points to "constraints on essentially the crude oil grades that are available to those refineries" as the factor that limits how much diesel each barrel can produce. Pushing output toward diesel also comes at a cost elsewhere. "It will take off some jet fuel from the market. But you're not seeing as high of strength in jet fuel margins as you are in diesel margins globally," he says. Whereas diesel carries the stronger margin globally, jet fuel supply gives up some barrels, which explains why refiners accept the trade-off.
"Because these refineries are running at extremely high elevated rates, it leaves them very sensitive. So if one goes off, then the refined products market will respond aggressively."Heating oil supply depends on refineries operating at those extremely high rates, a setup Hodes describes as leaving the refined products market sensitive to a single shutdown. The risk is not limited to North America. Middle East refiners remain exposed to attacks on Saudi oil infrastructure, adding another source of potential outages. Consequently, one unplanned shutdown can tighten diesel and heating oil supply across the refined products market.
Heating oil and diesel supply strain shows up first in where refined product shipments are going and which refiners are back online. Hodes highlights refined product flows as the place to track recovery, alongside European and North American refiners returning to the market. Russian refined product exports show how much additional diesel is reaching buyers, while U.S. Gulf Coast prices and export demand for U.S. barrels show how strongly other regions are drawing on American supply.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Alex Hodes, StoneX Director Energy Market Strategy
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