Gulf coast diesel finds support from ag, power

Agriculture and power generation demand has supported US Gulf coast diesel markets this month relative to gasoline and jet fuel, which have seen demand fall sharply in response to the coronavirus pandemic.

Yet demand for diesel may begin to flag as domestic agribusiness and countries that stocked up on imports this month to take advantage of falling prices are expected to buy less going forward.

Brazil, the second largest taker of Gulf coast diesel, imported a large volume of diesel to arrive in March — even with an ongoing domestic surplus — as buyers took advantage of the open arbitrage from the Gulf coast.

Gulf coast exports to Brazil are expected to decline as overall domestic demand for diesel has already begun to fall in Brazil by an estimated 15-20pc.

Market participants report a similar situation in Mexico, where pre-buying diesel at lower prices has masked a swift fall in domestic demand. That slowdown is expected to become more apparent throughout April.

Domestic diesel demand in Mexico fell by 19pc to 312,000 b/d in the week ended 6 March from the week prior. Diesel imports to Mexico surged by 85pc and domestic production increased by 57pc during the same week.

Ag, power may set the floor

Throughout Latin America agriculture is expected to maintain steady demand, which may help provide a floor for Gulf coast diesel in coming months.

Power generation in Latin America remains an important factor for diesel demand as well. Long term drought conditions have pressured hydroelectric power generation in countries such as Chile. Investments in hydroelectric power have fallen off throughout Latin America in recent years as drought-prone areas have resorted to burning diesel to run power plants.

Many countries on the western coast of Latin America, such as Peru, Chile, and Ecuador, buy diesel mostly through long term tender contracts. These shipments are agreed to anywhere from four months to a year in advance. Market participants say these countries had requested more diesel than usual over the past month for power generation because of the droughts — diesel that will continue to be exported over the coming months. None of these contracts have been reported delayed yet.

US spring ag support

This spring US diesel prices could also receive support from domestic agriculture demand. The arbitrage opportunity for shipping Gulf coast ULSD along the Magellan Pipeline to Group Three in Tulsa, Oklahoma, has been narrowly open on paper the past three sessions, with Group Three prices fetching a 5.81¢/USG premium over Gulf coast ULSD.

Midcontinent diesel consumption was tempered last year as heavy rains caused river delays and dampened the region's planting and harvest seasons. Market participants expect an uptick in agriculture diesel demand in 2020.

By Wendy Dulaney, Gabrielle Moreira, Sergio Meana Aguilera and Jared Ainsworth