Diesel Producers Reluctant to Lock Future Production Prices Similar to COVID Period Start

Energy markets are attempting another rally to start Tuesday’s session, after early gains were erased once again Monday.

Money managers continue to be conflicted on the outlook for energy prices with RBOB, ULSD and Brent all seeing reductions in large speculative length last week while WTI and Gasoil (European USLD equivalent) both saw increases. The short covering in Gasoil contracts which had reached a record net-short position just a couple of months ago has received a fair amount of attention lately as colder winter weather in 2024 is sparking concerns of a potential diesel shortage in Europe after 2 easy seasons.

As diesel crack spreads have shrunk in recent months, producers have removed the majority of their hedges on ULSD, with the producer/merchant category net short position shrinking to its smallest level since March 2020. Put it another way, the last time producers of diesel were this unwilling to lock in the prices for future production was during the COVID price collapse when ULSD traded from $1.50/gallon in February to $.73/gallon in April.

The EIA this morning published a note on the small volume of Renewable Diesel that’s been trickling to the East Coast in the past year, citing many of the reasons why that coast sees only 1% of its diesel demand supplied by renewables, while the West Coast is getting close to 50%. Since the Clean Fuel Production Credit (which is replacing the Blenders Tax Credit in January) doesn’t apply to imports, and no states in the East are close to passing a low carbon fuel requirement, it’s unlikely we’ll see the flow to the East Coast increase next year, but reductions are likely with Neste’s Rotterdam facility offline and with more focus on SAF going to Europe.