Oil refineries are focusing on jet fuel/diesel and say screw you to summer drivers

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Due to the Eastern Europe difficulties American refineries are planning to spend the summer increasing the amount of jet fuel and diesel fuel that they produce. Historically jet fuel and diesel fuel has been the least profitable amount part of oil. Traders and analysts say that this will come at the expense of the production of gasoline, which traditionally is ramped up for summer driving. This is contrary to historical markets. Currently jet fuel and diesel are much more profitable than gasoline even though the summer driving season is coming up.

Normally this is the time that US refiners would ramp up gasoline production for the summer driving demand. This is also the time when diesel and jet fuel profitability would wane. In between the planting and harvest season less diesel fuel is required. However due to the Eastern European difficulties Western Europe is willing to pay more to relieve the energy crisis they are currently in. There have been multiple pandemic related refinery shutdowns that have reduced capacity and natural gas prices surged in Europe.

Since about the beginning of April distillate exportation has averaged above 1.6 million barrels a day according to US Energy Information Administration. The US is now the barrel of last resort for the Atlantic basin. This has boosted the profits for US refiners and distillates of distillates. The profit margin has gone up to nearly $60 a barrel for distillates. Meanwhile, the profit margin is only $34 a barrel for gasoline. Historically distillates profit margin was approximately $26 whereas gasoline’s profit margin was approximately $27 per barrel.

“U.S. refineries may have little incentive to switch to higher gasoline yields as the differential between RBOB and heating oil remains wide,” Citi wrote.

Although export demand has risen not everyone in the US has seen the same benefit. Gulf Coast refineries have been working at 94% Of maximum yield capacity. However, Midwest farmers have had weak demand due to cold weather and delayed planting seasons. On Sunday planting was only four percent complete which is below the five-year moving average of approximately 6%. Nationwide distillate inventories have hit lows not seen since May of 2008. Distillate stocks known as PADD 2 are only .4% below where they were a year ago, however. Ultra-low sulfur diesel was trading at 21.5 cents per gallon below diesel futures on Tuesday at this time last year.

Refiners also increase jet fuel as air travel has rebounded after the pandemic slump. On the East Coast jet fuel traded at more than $100 above Brent crude futures due to a 32 year low on inventory of jet fuel. With the rising cost of diesel and gasoline, US consumption has started to reduce. Demand for both fuels have recently dropped below the five-year average.

So, expect to pay more at the pump when you fill up your car this summer. Also, since diesel and gasoline are leading indicators of inflation due to trucking products to and from suppliers and consumers, expect everything you buy to be a little bit more expensive. This isn’t necessarily due to inflation; however, it will be seen as a symptom that is like inflation. So you might want to rethink any summer driving plans.

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