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Too much oil, too little diesel

Written by PrivCo
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Western Texas Intermediate crude oil has been hovering over the mid-teen level after settling at negative 37 dollars per barrel the day before the May expiry. Covid-19 has erased demand for crude, and the excess supply of crude has filled up all storages, causing traders and producers to pay money to offload their crude.

Since then, some wells in the US have begun shut-ins. Refiners have prolonged their spring maintenance most likely for the IMO 2020 standard but also to wind down their production given the collapse in the refined product price and demand. Indeed, with air and ground travel significantly reduced, the refining margin at some refiners has turned negative as well.

demand projection and refiner runs

However, another problem might emerge soon- the world will have too much crude oil but too little diesel. The collapse in gasoline and jet fuel demand makes it difficult to produce enough gasoil (diesel) when the product inventories for unwanted fuels limit storage capacity. Limitations on pipeline flow restrict the availability of critical crude oil feedstock and are additional obstacles to higher levels of refinery utilization. Across the board, most refining margins have turned negative because of unwanted gasoline and jet fuel products. And, If refinery utilization is reduced much below 70% let alone 60% overall refinery operations might be uneconomic, and more refinery units and whole plants can be shut.

surplus/deficit jet fuel, gasoline, and diesel

We can see from the projected surplus/deficit for different refined products, that jet fuel and gasoline will be in deep surplus while diesel in deep deficit. That is because of the aforementioned negative refining margin and subsequently projected shut-ins. The refining process of crude is such that a spectrum of products is produced. If only one of the products is in demand, the refiners still need to find storage for the rest, therefore rendering the whole process unprofitable.

The projected shortage in diesel might make the already strained logistic and supply chain issue more apparent in the coming months. With most of the world still rely heavily on e-commerce while WFH, the logistical consideration might be a bigger challenge for retailers and logistics companies alike.

The headwind in the industry might just prove to be the catalyst for wider adoption of freight and trucking logistic startups that introduce more price transparency and competition in the freight market.

The smart freight/marketplace sector has seen significant funding activities in the past few years. Last year alone, the industry has seen 39 deals totaling ~$3bn in value. Successful companies in the sector have emerged such as Convoy, uShip, Transfix, Trucker Path, Arrive Logistics, and Loadsmart. These companies are pressuring incumbent freight brokers to pour capital into digital technologies to keep pace with emerging startups.

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