Viewpoint: Rainy weather may curb midcon diesel demand

Heavy precipitation forecast for the US midcontinent in the first quarter of 2021 could stymie the region's agricultural activity and slash diesel demand that is already languishing amid the Covid-19 pandemic.

The strongest La Niña weather pattern in nearly a decade is expected to bring above-average rainfall for much of the midcontinent during the winter and spring, according to the US National Oceanic and Atmospheric Administration (NOAA). Illinois, Indiana, Michigan and Ohio have 50-60pc chances of above average precipitation during the first three months of 2021.

This could prompt a repeat of 2019, when heavy rainfall caused river delays and stifled the region's spring planting season.

Agriculture activity is regularly the second highest end use for diesel in the midcontinent, behind on-highway use. Farming accounted for 9.3pc of the region's diesel demand from 2013 through 2018, according to the US Energy Information Administration (EIA).

Delayed or missed crop seasons could mean fewer ultra-low sulphur diesel (ULSD) shipments from the US Gulf coast. The midcontinent received 108,968 b/d of diesel from the Gulf coast in May 2020, at the peak of the spring planting season, per EIA estimates. That was more than double May 2019 levels, when heavy rains cut midcontinent demand. May also marked the largest volume of diesel shipments for any month since December 2015.

But pipeline shipments of Gulf coast diesel to the midcontinent tapered since this spring amid slashed on-road demand caused by Covid-19 containment measures, with volumes in August and September lagging year-earlier levels by 13.9pc.

Even during periods of viable arbitrage on paper for sending Gulf coast diesel to Chicago, market participants did not see a surge in shipments in October and November, as prompt strength in diesel prices was always short-lived.

The steep backwardation — when prompt prices are above forward values —in the Chicago market has prevented shippers from booking large batches of arbitrage supply from the Gulf coast, as the product will lose value before it reaches its destination market.

Instead, Gulf coast diesel inventories grew to average 41.4mn bl in November, EIA data show. This was up by 29pc from a year earlier and the largest volume for any November since the EIA began its estimates on the region's diesel inventories in 2004.

The midcontinent may also not provide an outlet for Gulf coast diesel this winter, as some midcontinent refiners are bracing for lower demand and reduced rates. Midcontinent diesel demand is often the lowest from December through February, during the winter months between the region's harvest and planting seasons.

US distillate fuel oil demand fell to a four-month low of 3.4mn b/d the week ended 4 December. This was down by 9.2pc from the same week in 2019 and a five-year low for the first week of December.

Gasoline arb flows also diminished

Shipments of finished gasoline from the US Gulf coast to the midcon have similarly dwindled over the past year, in part because the Covid-19 pandemic cut down road travel. As the pandemic rages on, demand is not expected to recover in the short term, especially since President-elect Joe Biden plans to step up federal efforts to enforce social distancing. Companies are expected to continue to let employees work from home even after pandemic restrictions end.

The midcontinent received 21,677 b/d of finished gasoline from the Gulf coast from April through September this year, according to the EIA's most recent data.This was down by 50.7pc from the same six months in 2019, and it was the lowest stretch of shipments from the Gulf coast since late 2014.

Additionally, the midcontinent's finished gasoline inventories reached a six-month high of 51.8mn bl the week ended 4 December, up by nearly 3pc from year-earlier levels.

By Jared Ainsworth