Viewpoint: Rain may weigh on US midcon diesel in 2020

Heavy rain and flooding early next year could again pressure US midcontinent diesel prices in 2020.

Above-average precipitation is anticipated throughout the region next spring, which could lead to a potential drop in demand from agriculture customers and an inventory build similar to what was seen in 2019. The impact could continue into the fall, with harvest demand pushed back later into the season.

There is a 55pc chance of heavy rainfall for much of the midcontinent during the heart of agriculture planting season in March, April and May, according to the long-range forecast by the US National Oceanic and Atmospheric Administration (NOAA). The heaviest rainfall is forecast in Minnesota, near the source of the Mississippi River.

Heavy rainfall could begin early in the year, with above-normal rainfall expected in January and February, according to NOAA. Below-average temperatures are also forecast for much of the region during January, February and March, which could leave the midcontinent prone to snowmelt and river flooding, similar to what the region experienced in early 2019.

Widespread river flooding caused delays along waterways and stifled agricultural demand for diesel.

Agricultural activity is a main driver of midcontinent diesel demand during planting and harvest seasons. The 2019 flooding caused midcontinent ultra-low sulphur diesel (ULSD) inventories to rise to 32.3mn bl in May, up by 11.1pc from year-prior levels, according to data from the US Energy Information Administration (EIA).

Implied ULSD demand in the midcontinent fell to a three-year low for the month of May at 1.2mn b/d. Only 58pc of US corn was planted by the week ended 26 May, down by 32 percentage points from the five-year average, according to the US Department of Agriculture (USDA).

The heavy rain and flooding also sent midcontinent ULSD differentials versus Nymex futures well below year-prior levels for much of 2019. Western midcontinent Magellan pipeline ULSD cash differentials at Tulsa, Oklahoma, averaged June Nymex -3.05¢/USG in May, down by 3.59¢/USG in yearly comparison.

Another wet spring could weigh on midcontinent ULSD demand well into next fall. Midcontinent ULSD demand peaked in October each year from 2010 to 2018, according to the EIA. Yet market participants saw lower demand this past October, with harvest lagging the five-year average.

US corn harvested by the week ended 27 October was only 41pc, down by 20 percentage points from the five-year average, per USDA data.

As a result, Group Three ULSD cash differentials versus the Nymex ULSD contract averaged -3.79¢/USG in October and November, down by 4.29¢/USG from year-prior levels. In Chicago, West Shore/Badger pipeline ULSD averaged -5.631¢/USG versus the Nymex during that span, down from year-prior levels of -0.186¢/USG.

If repeated heavy rainfall and flooding occurs, arbitrage opportunities for shipping US Gulf coast ULSD to the midcontinent could be unviable for much of 2020.

Arbitrage for shipping Gulf coast ULSD on the Magellan pipeline to Tulsa, Oklahoma, has been open on paper for a total of two weeks over the last nine months of 2019, compared with in 2018 when the arbitrage was open for much of the fall. The Gulf coast arbitrage to Chicago along the Explorer pipeline was open on paper for only five weeks in 2019.

The arbitrage even reversed early in 2019, with midcontinent refiners barging product down the Mississippi River to the Gulf coast for exports. Others sought outlets eastward into Pennsylvania for higher prices.

By Jared Ainsworth