US midcontinent diesel strengthens on stock draw

US midcontinent diesel cash differentials hit multi-month highs last week as regional inventories showed the largest weekly decline since November 2017.

ULSD on the Magellan pipeline at Tulsa, Oklahoma, rose to its highest level in five months against Nymex futures, with deals from -1¢/USG to -0.85¢/USG versus October Nymex yesterday. In Chicago, West Shore/Badger ULSD increased by 23.25¢/USG in the past seven sessions to a seven-week high yesterday at November Nymex -3.75¢/USG for C1 October.

Midcontinent ultra-low sulphur diesel (ULSD) inventories shrank by 7.7pc, or 2.6mn bl, to a 12-week low of 30.9mn bl in the week ended 20 September, according to the US Energy Information Administration (EIA). This was the largest weekly draw since November 2017.

Domestic demand for distillate fuel oil picked up last week, increasing by 1pc to 3.9mn b/d from the prior week, EIA data showed.

Midcontinent diesel differentials have room to grow as delayed agriculture demand picks up in the next two months.

Agricultural activity — a heavy end user of diesel in the US midcontinent — has fallen behind year-ago levels because of flooding that spurred late planting earlier this year.

The harvest season in the midcontinent often peaks in October, but market participants have said the heaviest amount of agricultural demand this year could be delayed until November.

The proportion of US corn at the mature stage is lagging by 40 percentage points from year-ago levels at 29pc as of 22 September, according to the US Department of Agriculture (USDA).

The delayed agriculture demand has weighed on ULSD values, which are well-behind last year's levels.

Group Three ULSD cash differentials are 4.57¢/USG below year-ago levels so far in September, while West Shore/Badger differentials are down by 18.33¢/USG in yearly comparison. Outright prices — which have averaged $1.91/USG in Group Three and $1.76/USG along the West Shore/Badger system this month — are also below last year's values.

This has limited arbitrage opportunities for shipping US Gulf coast ULSD to Group Three, which was open on paper in September 2018 but has not been feasible this year since April. Arbitrage opportunity from the Gulf coast to Chicago has been closed on paper since November, 2018.

A rise in agriculture demand in the midcontinent could reopen the arbitrage from the Gulf coast, where inventories were 5pc above year-ago levels last week at 34.8mn bl, according to the EIA. However, market participants believe a hefty amount of ULSD inventories at the Chicago Buckeye Complex could make arbitrage difficult along the Explorer Pipeline even if agriculture demand increases.