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Diesel Stocks Dip: Heating Oil Struggles Before Winter

Diesel and heating oil stocks in the United States have reached historic lows, forcing up costs for fuels used by industry, freight, agriculture, and many families.

According to official data issued on Wednesday, inventories of the fuel category that includes both products remained at 107.4 million barrels last week, up slightly from the previous week but the lowest level for this time of year since 1951.

The highway price of diesel is up 47% year on year to $5.35 a gallon, while heating oil is up 70% to nearly $6 per gallon. The US petroleum benchmark, West Texas Intermediate, has risen only 6% year on year.

“It’s a difficult atmosphere. There is no doubt that the energy markets are unpredictable, and inventories are historically low,” said Michael Ferrante, president of the Massachusetts Energy Marketers Association, a trade group comprised of heating oil dealers.

Distillate inventories in the United States are 15% lower than the five-year average.

The reduction in diesel reserves coincides with constant demand and increased shipments to Europe to offset now-sanctioned Russian supplies. When European restrictions on seaborne Russian crude oil tighten in December and are extended to refined petroleum products in February, pressure on US inventories is expected to worsen.

The developments raise the prospect of bidding wars between the United States and Europe to acquire supplies. On Tuesday, the International Energy Agency warned of “ferocious” competition for non-Russian diesel.

“If Russian diesel flows are cut off, everyone tightens up, and it becomes a fight for who gets the volumes,” said Richard Joswick, head of global oil analytics at S&P Global Commodity Insights.

Officials in the Biden administration have stated that “all options remain on the table” to deal with the stock slump, including prospective export restrictions.

According to the Oil Price Information Service, which analyzes worldwide oil markets, shippers have already diverted some international diesel cargoes initially bound for Europe to the US northeast, enticed by strong prices.

“Even if stocks are low, the market will price itself in such a way that it attracts that barrel from any time and everywhere,” said Eric Slifka, CEO of Massachusetts-based Global Partners, which manages oil storage terminals and gas stations.

Heating oil prices have risen over 70% year on year.

Diesel is an essential input for the US industry, construction, and transportation. Recent refinery closures, including Philadelphia Energy Solutions’ large 335,000 barrels-per-day plant on the US east coast, have drained domestic supplies. According to the US Energy Information Administration, crude oil refining capacity in the United States averaged 17.9 million barrels per day on January 1, the lowest level since 2014.

“Refining [profit] margins continue to be maintained by strong product demand, low product inventories, and sustained energy cost advantages for US refineries relative to worldwide competitors,” Joseph Gorder, CEO of large refining company Valero Energy, said last month during an earnings call.

Bath and Body Works, Kellogg, and Clorox have all stated that rising diesel prices are driving up logistics and product pricing.

“We expect diesel costs to remain stable during the winter, which will have an impact on inflation across the country,” Joswick added.

During the autumn harvest, farmers are also feeling the pinch.

“It definitely erodes farming profitability and, in some circumstances, has an effect on production,” said Brent Johnson, farmer, and president of the Iowa Farm Bureau.

According to the Energy Information Administration, households using heating oil will pay 45 percent more this winter than last. More than 5 million US households use heating oil to heat their homes, with the vast majority residing in New England and the mid-Atlantic regions.

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