The Split Personality of Gasoline and Diesel

EconMatters's picture


By EconMatters


Crude oil tanked to its lowest in more than six weeks, amid a broad selloff in other commodities and equities with investors increasing fear of another global recession after the U.S. Federal Reservewarnedof "significant downside risks" to the U.S. economy on Thursday, Sept. 22. Oil prices plunged $5.00 a barrel on that day, and as of Friday, Sept. 23, WTI sank to $79.96 a barrel, while the ever relentless Brent also retreated to $103.97.


Market expectation is that crude oil prices are expected to continue to fall in the coming week on concern economic growth will slow in the U.S. and China, according to a Bloomberg survey.  However, Financial Timesnoteda diverging expectation between the financial and physical traders:

“The crude oil market is witnessing a titanic battle: some macroeconomic hedge funds are betting on a drop in prices yet most physical traders are placing wagers that prices will rise.”

Reuters also reported in mid September that lower production and disruptions to North Sea, plus the loss of Libyan crude exports have “combined to producean extraordinary backwardation across European crude markets.” Backwardation refers to the market condition where the price of a futures contract is trading lower than the spot price, which typically reflects a tight supply market for immediate purchases and deliveries.


A similar split is also observed in the gasoline and diesel product markets. Bloombergciteda report from API (American Petroleum Institute) thatdistillate fuel deliveries, which include diesel and heating oil,hit record highs, rising 11% year-over-year to 4.15 million b/d for the August month, whilemotor gasoline deliveries fell to a 10-year low. (See Charts Below). Overall, year-to-date product consumption averaged 19.1 million a day, down 0.3% from a year ago.


Chart Source: EIA

Chart Source: EIA


This disparity is primarily due to the diverging drivers behind the consumer and industrial activities as high unemployment and stagnant wage continue to crimp consumer spending, while industrial and manufacturing activity are revving up.  This trend is expected to continue in the global energy market as well with emerging economies among the heavy users of diesel/gasoil/distillate.



Chart Source: Valero Presentation Sep. 2011



Older refineries in Europe and on the U.S. East Coast (sinceWTI is landlocked at Cushing, OK) that are not upgraded to handle heavy sour crudes generally prefer West African crudes due to their lower sulfer content (about half of the average Brent) and higher (up to twice more) distillate yield.


Rising diesel demand, increasing regulatory requirements to remove all sulfur, and the loss of Libyan crude all contributed to form a perfect storm making African crudes the hottest grade among global refiners including the energy-starved China.


Meanwhile, the Great Recession and high oil prices have basically knocked the highly consumer dependent gasoline (demand as well as margins) into playing second fiddle to the industrial diesel (See 2 Crack Charts).


So the surging price of African light sweet crudes has been the kiss of death to U.S. and European refineries that are not equipped to either crank up the higher-margin diesel production, or unable to process the cheaper heavy sour crude into products that are compliant with environmental regulations. That was part of the reasonSunoco closed down two refineries in the Philly areaand exited the refining business all together. More refineries in the U.S. as well as on a global basis could also be at risk. ((See Chart Below)



Chart Source: Valero Presentation Sep. 2011

Chart Source: Valero Presentation Sep. 2011





Chart Source: Valero Presentation Sep. 2011


In the U.S., crude oil remains well stocked, and inventory level at Cushing, OK, the delivery point of NYMEX WTI futures contracts, stood at 32 million barrels the week ending Sept. 16, depressing the WTI price and partly accounts for WTI’s wide $24 a barrel discount to Brent, which historically trades $1-2 per barrel lower than WTI.


However, the closure of two Sonoco refineries could mean a loss of about 300,000-4000,000 b/p gasoline and 250,000 to 300,000 b/p of diesel supplies. Amid the new 10-year low gasoline demand trend, the potential loss of gasoline supply would not be a big deal. But diesel is a sector with increasing global demand and with more refinery closures on the horizon,diesel could see significant price spikes in the coming months, and as early as Nov/Dec.  


So petroleum products as well as refinery capacity and configuration are increasingly dictating the price direction of crude oil, which also reflects the diminishing relevance of WTI and Brent oil markers.  Moreover, despite WTI's steep discount to Brent, U.S. product prices will continue to trend with Brent since only a handful of midwest refiners can get their hands on WTI crude at the low WTI price.


Near term, our prediction in May of $80/bbl WTI oil price by September has materialized, and for now we expect WTI to be range-bound between$80 to $90 a barrel levels for the rest of the year, but it could get sold down to as low as $75 (Saudi's "floor") or as high as $95 (Christmas Rally).  Longer term, WTI and Brent spread is not expected to narrow significantly till the pipeline takeaway capacityin Cushing come online in the 2013-2015 time frame.


So U.S. crude oil market could see mostly sideway moves hinging on macroeconomic indicators well into 2012 or 2013, which would suggest limited income upside for the U.S. producers.  However, refiners such as Valero and PBF Energy that have made the necessary shift to more distillate production and heavy sour crude processing could see increasing market share and good product prices and margins.


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Piranhanoia's picture

after reading the other posts all I can say is...

Electric Bitchez!

DosZap's picture

What they fail to tell US, is WE are exporting Diesel, and Gasoline(both ready to use) overseas.

So, how does this work?,we are/will be paying more at the pump, we have a EXCESS of BOTH, and we are selling it overseas?.

IF the Congress, and the PO'US gave a damn about costs of fuel to consumers in AMERICUH, seems like we should be selling it here at discounted prices.

No, we're too busy BANNING Asthma Inhalers, anmd replacing them w/ Green Models, at 200-500% MORE COST.

(FOR CLIMATE CONTROL,they still pushing that disproven hogshit).

NOW AIN'T DAT SOME SHIUTTT..................SOME champion OF THE midddle class WE HAVE AT 1600.

jpintx's picture

As to gasoline, you are mistaken, we are a net importer of gasoline.  Diesel, we are a net exporter, although from memory, I think that is preominately high sulfur diesel which cannot be sold here.  The whole matter of exports can be tricky as product shipped by pipeline that leaves the US to Canada and returns (this happens because of the pipeline route), counts as both an export and an import.  

You are not paying more because of this, believe me, if an arb opens up in any direction, it gets filled so long as transportation can be found so world prices ex tax schemes are rarely different by very much for very long. Here is the link for imports and exports, I am pretty sure there is more detail available, ther used to be, shipments within PADDs, who exports, were to, where imports were from etc., if you care to look. 

jpintx's picture

Couple of things.

1) When you take out sulfur you reduce lubricity, so if you have an older diesel engine you should consider adding "diesel slick" or even some cheap 30 weight motor oil to your tank when you fill up, cheap insurance versus replacing injectors.  And you will pay a lot more for the ULSD, as someone pointed out, the capital cost of refinery upgrades to reduce sulfur by a full order of magnitude is very high.  A perfect example of diminishing returns in green shit.

2) Diesel demand has historically been a good indicator for industrial/economic growth, beats me what's going on now!

rufus13's picture

My 1983 sedan with OM616 engine will burn even the newest "low sulfur" fuel and put out the same old particle count as 27 years ago.  With a little bit of centrifugal filtering, I can put the drained oil in the fuel tank for airborne disposal with vehicle propulsion as a side effect. Expired-date 10L boxes of fryer oil (never used, by the pallet almost free) can be used directly as long as there is half a tank of real Diesel in the tank and it's spring or summer. Just got an extra 80L tank for the boot, so it can go 1000+ miles without refueling.  It's an excellent, if slow, old car. 


I miss my 1980 VW Dasher Diesel Wagon. It was never tailgated for more than a few seconds. Push throttle down on a grade and the car did not go faster, but a huge black cloud came out the pipe! Ha ha zooming m-f'r. The right lane of I-10 to Riverside is MY lane. 

UC Riverside doesn't do asthma research for no reason. 


s2man's picture

"industrial and manufacturing activity are revving up"? I missed that story. 

I see it as, I'm driving less, so gasoline usage is down.  But it still takes diesel trucks to deliver my Stuff to Wally World. 

MrBoompi's picture

“The crude oil market is witnessing a titanic battle: some macroeconomic hedge funds are betting on a drop in prices yet most physical traders are placing wagers that prices will rise.”


If the paper market, especially the derivatives market, for oil is 100X larger than the physical market, we ALL know who wins this battle.



drunkagain's picture

interesting....diesel was selling at a $0.10 discount in the spring here in sunny Calgary Alberta but now has closed to parity with the low octane gas. my suv tdi just chugs the stuff so I really hope this guy has it all wrong.

boiltherich's picture

No mention above of the fact that we import gasoline while we are net exporters of diesel.  No matter, I see RBOB on the NYMEX is down to $2.55 on Friday and gas has gotten as low as $2.99 in the Houston region, here we dropped ffrom $3.989 to $3.899, and we all know that it is nothing but pure theft, used to be illegal price fixing/gouging was, but we also all know financial crimes by business are not only not enforced these days they are encouraged.  My attitude is this, charge what you want for fuel, utilities, food, the necessities that are deleted from the CPI, I will eat and drive and use electric lights and A/C as if the world were still fair and sane, but I will buy nothing else, I will gob the whole lot of any remaining funds onto outstanding credit card debt until they are paid off, and should that ever happen I will use my extra money to buy phisical silver no matter the price.  No more Starbucks, no more Barnes & Noble, no more visits to the mall, no more car washes, I will do it myself from now on. 

Joe Sixpack's picture

Wunderbar. I'm glad we bought that fuel efficient VW TDI Sportwagen now!

When we bought it (Sept. 2010), Diesel was abiout 5 cents more then regular unleaded. Now it is about 59 cents more and apparently rising. We do get 34+ mpg overall, but still those savings are getting priced in.

Cthonic's picture

The price differential between sweet and sour crude is incredible. Does it really cost anywhere near that much to add/run a hydrotreater as part of a refinery process?  Also, could someone in the industry explain why it is so important to remove all of the sulphur from diesel?  They only started doing this in the last decade or so, and it's jacked fuel prices up considerably.

covert's picture

time to put all of the arabian empire onto the food for oil program.


W.M. Worry's picture

The sulphur kills our diesel particulate filters hence the requirement for ULSD. Our local refinery is changing over to ULSD at a cost of 500 million with no added capacity.

CapitalAnarchy's picture

Sounds like a good place for some Jobs Act monies. Too bad they didn’t spend that $500 million on K-Street. In today’s world, only suckers spend their money on investing directly into operations. Refineries got stuffed by those corrupt alternative energy rise & flop corporations. Of course, its hard to lobby against ‘save the planet’ and ‘go green’ initiatives.

NotApplicable's picture

Refiners would've stolen the money just like any other rent seeker.

JohnFrodo's picture

They eliminate sulfer because it creates the worst part of air pollution. So you can pay at the pump or pay at the hospital. Furthermore high tech engines will not work properly with high sulfer content. The best engines must use the even higher grade Euro gas, and are not available in the USA.

Joe Sixpack's picture

If the refinery is not prepared for it, it takes a lot of time, space and cost to change the process, and they may just not do it (lack of space, cost considerations, etc.)- i.e., refinerys closing in Philly. Refinerys are not Lego pieces.

As for sulfur- it is regulation that drives it.