Diesel may drive US refiners' second quarter results

Second quarter US refining profits could be diesel powered for the first time since 2014.

Implied US demand for the fuel lagged year-ago levels for the second quarter, at 4.1mn b/d, according to the Energy Information Administration (EIA). But more exports and sharply lower distillate inventories helped diesel premiums to crude benchmarks overtake gasolinein every region but the west coast for the period, based on Argus assessments.

Diesel demand in the US typically peaks in the winter as northeastern states that use the fuel for heating oil join traditional industrial and transportation consumption. Those inventories usually rebuild during the second quarter as heating demand gives way to the launch of gasoline demand for the summer driving season.

But total US distillate inventories have for the past three years continued to decline through the second quarter. Total national distillate stockpiles closed the quarter at 117.6mn bl, the lowest quarterly volume since that year. Ultra-low sulfur diesel (ULSD) inventories were their lowest over the same period, at 104.8mn bl at the end of the second quarter.

Record second quarter distillate export levels helped keep production away from storage. EIA weekly estimates of exports averaged 1.36mn b/d, the highest for the quarter since the administration began tracking weekly distillate exports in 2010. The average was within 22,000 b/d of the outright record quarterly average of 1.38mn b/d set in the fourth quarter last year.

Crude transportation constraints depressed prices in the second quarter and produced the widest spreads between regional diesel and crude benchmarks. Midland-priced West Texas Intermediate (WTI) in the US Gulf coast and a combination of Bakken and West Canadian Select (WCS) in the midcontinent both averaged distillate spreads higher than $27/bl. Production in the west Texas and New Mexico Permian fields has outstripped pipeline capacity out of the region, dropping Midland to an average $8.12/bl discount to WTI at Cushingfor the quarter.

Leaks and maintenance issues limited pipeline capacity out of Alberta for WCS into the second quarter, and producers struggled to find rail alternatives. WCS at Hardisty averaged an $18.55/bl discount to WTI at Cushing for the quarter, almost double the spread for the same period of 2017 and 50pc higher than the five-year average $12.09/bl discount.

But even crack spreads based around more conventional benchmarks decisively favored diesel during the quarter. US Atlantic coast refiners running Brent and Chicago market and Gulf coast refiners processing WTI Cushing all saw stronger premiums for distillates.

Average California cracks only narrowly tilted toward gasoline for the period, with the fuel edging out ultra-low sulfur diesel by no more than a 5¢/bl average. Diesel premiums to the Alaskan North Slope (ANS) crude benchmark exceeded gasoline by mid-May. The distillate spread for ANS in southern and northern California has exceeded gasoline in July so far.

US independent refiners begin reporting second quarter earnings next week.