Viewpoint: Atlantic coast distillates see rising demand

US Atlantic coast ultra-low sulphur distillate fundamentals could rise as demand peaks this winter amid lower regional inventories.

Ultra-low sulphur diesel (ULSD) on the Buckeye pipeline has averaged $2.12886/USG since the start of July, about 43pc higher than where prices stood the same period last year. During the same period — through 25 July — Buckeye pipeline ultra-low sulphur heating oil (ULSH) prices have averaged $2.09964/USG, about 49pc higher year-over-year.

The stronger prices, which have partly been driven by lower ultra-low sulphur distillate fuel oil stockpiles, has resulted in less incentive to store the product along the US Atlantic coast.

Inventories fell during the week ending 20 July, by 285,000 bl, to 30.9mn bl. That's about 14.9mn bl below where inventories stood the same week last year and 22pc below the five-year average.

Inventories took a tumble last year because of a series of hurricanes impacting pipelines and refineries along both the US Texas Gulf coast and the Florida coast.

Inventories fell to a low of 25.33mn bl for the week that ended 18 May, a low level not seen since April 2015, according to data from the Energy Information Administration (EIA).

US exports of total distillate fuel oil have been marginally stronger in the last year, peaking at 1.84mn b/d for the week that ended 22 June. Since the start of June, exports have averaged 1.36mn b/d, up from an average of 1.17mn b/d the same period last year.

In addition to stronger exports, inventories have not been building amid stronger cash prices, which has been partly driven by higher Nymex prices.

The Nymex futures contract as of 25 July stood at $2.1512/USG, up from $1.5685/USG the same day last year.

The arbitrage with the US Gulf coast ULSD market has been shut on paper since May. Since the start of July, New York Harbor ULSD has averaged a 4.37¢/USG premium to the Gulf. For the arbitrage to open, the spread must be at least 5.49¢/USG.

Volatility in the Argus Renewable Volume Obligation (RVO) market has also hindered storage building. RVO measures the cost of producing on-road fuels but does not apply to ULSH, which results in more people buying ULSH for heating purposes in the winter.

ULSH prices have also been higher year-over-year, partly driven by a weaker RVO value. Since the start of July, RVO has averaged 3.21¢/USG, down from 9.2¢/USG during the same period last year.

The ULSH and ULSD forward curve have been flat throughout most of the summer trade months, which has also resulted in less product storing.