A diesel shortage in America could get worse.
Diesel shortages have been building since the start of the epidemic, and fuel inventories have fallen below emergency levels.
Two weeks ago, the Energy Information Administration said that the US had 25 days left of diesel reserves. Since 2008, stockpiles have been hovering below marks.
“How did we get here?” I asked Matt Smith, the lead oil analyst at Kpler. He told me that it comes down to supply and demand.
- People were forced to stay home, which halted gas demand.
- With demand crashing, the refinery stopped refining.
- Diesel demand stayed elevated as trucks continued to deliver goods around the country.
Diesel consumption continued, but production was largely slowed down.
The crisis has gotten worse because of two factors.
Smith said that the US is exporting more than a million barrels a day as demand has picked up. Russia’s diesel exports are going to be hit by the sanctions early next year, so the global backdrop is tight supply.
Competition in the diesel market has increased due to the fact that European nations are no longer buying Russian energy.
It’s unlikely that inventories bottom out at zero, according to Smith. Diesel prices will go up, which will spark behavioral changes in consumers and producers because markets are panicking.
He said that higher prices make the profitability of refining diesel go higher. In other words, refining companies have more incentive to increase production.
Customers will not be able to afford to keep buying fuel if diesel is expensive.
Smith said prices rise, which crimps demand, and that also crimps export demand and encourages import demand. Diesel prices are rising, that’s how the mechanism to do that is.
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