US ultra low sulfur diesel prices reached record highs on Sept. 1, driven by a confluence of global supply constraints, geopolitical tensions and record-breaking US exports.

Platts, part of S&P Global Energy, assessed the US Gulf Coast Colonial Pipeline ULSD at $4.6973/gal Sept. 1, up 27.17 cents/gal from the previous day and marking the highest value since assessments began in May 2006.

The price rise came as the underlying prompt NYMEX ULSD futures contract climbed 18.36 cents/gal to its second-highest level on record, extending the rally in previous days. “The screens are going nuts,” said a broker Aug. 31.

The US Gulf Coast ULSD differential also rose on the day, reaching a 2-cent/gal premium over futures.

Exports reach record high
A key driver behind the price spike was Russia’s extension of its diesel export ban for refiners until Sept. 30, aimed at stabilizing its domestic fuel market. The ban, announced by Russia’s energy ministry, restricts exports of diesel, marine fuel and gasoil from direct producers.

Moscow’s diesel export ban has amplified the US Gulf Coast as the factory floor for global diesel supply.

S&P Global Commodities at Sea(opens in a new tab) data shows US diesel and gasoil exports soared to a record 54.2 million barrels in August, surpassing the previous high set in July by 7.6 million barrels. This is the third time since the US-Iran conflict that monthly exports have set a new all-time high.

Elevated Renewable Volume Obligation values have further incentivized exports, as refiners can avoid RVO costs when shipping diesel abroad. Platts assessed the RVO at 35.2105 cents/gal on Sept. 1, its highest level since Aug. 20.

Domestic demand reduces inventories
Exports are competing with domestic demand. The latest Energy Information Administration data released Aug. 26 showed stocks of ULSD fell for the fourth straight week to 93.590 million barrels in the week ended Aug. 21.

Backwardation between October and November NYMEX futures stood at 17.19 cents/gal on Sept. 1. Despite persistently strong backwardation pushing buyers to supply themselves “hand-to-mouth”, as two market participants described the behavior, distillate fuel oil supplied — a proxy for demand — stood at 3.839 million b/d for the week ended Aug. 21, within the normal range for this time of the year, EIA data showed.

Seasonal demand factors, including the domestic harvest season, are coming into focus. Suppliers of diesel are currently shipping diesel to New York in preparation for the winter, a fourth market participant said.

Robust international and domestic demand has made diesel production lucrative for refiners. On Sept. 1, Platts recorded the prompt pipeline ULSD vs WTI front-month crack at $98.153/b, the highest since the assessments began in 2009. This marks the seventh time in the past month that the diesel crack has set a new all-time high.

Middle East war adds pressure
Further fueling the rally, the US launched fresh military strikes on Islamic Revolutionary Guard Corps targets in Iran on Sept. 1, escalating tensions in the Middle East. These geopolitical risks have added a risk premium to the diesel market, further elevating futures prices.

The Midwest’s Group 3 region mirrored the Gulf Coast’s highs, with ULSD Group 3 Pipeline prices assessed 25.42 cents/gal higher at $4.6273/gal. For the week ended Aug. 21, production in the region fell by 100,000 b/d to a three-week low, while inventories dropped to 27.7 million barrels, 1.6 million barrels below the five-year average, EIA data showed.

Source: Platts