U.S. oil refineries have ramped up their production of diesel, heating oil, and jet fuel in preparation for the winter season.
However, despite their efforts, they are grappling with profitability challenges due to a sharp decline in gasoline margins, which have plummeted by over 80% since the conclusion of the summer driving season.
Typically, as autumn arrives, refiners shift their focus towards producing more distillates like diesel and heating oil while striving to replenish their inventories, which had dwindled to near seasonal record lows.
This emphasis on distillate production inevitably results in the production of surplus gasoline, leading to an oversupply during a period of sluggish demand.
Furthermore, recent developments have exacerbated the situation. Russia’s brief diesel export ban, coupled with reduced refinery capacity and Western sanctions on Russian diesel, have led to decreased diesel inventories and tighter supplies.
In September, U.S. distillate fuel oil inventories were approximately 21 million barrels below the 10-year seasonal average, with similar deficits in European and Singaporean distillate inventories.
This shortage has driven up the U.S. heating oil crack, reaching nearly $44 a barrel, nearly double the seasonal average.
In addition, U.S. distillate demand hit a one-year high in the past week, with diesel and heating oil exports from U.S. refineries surging to 6.6 million barrels in September, the highest level in over a year.
While overall U.S. petroleum product exports reached a near-record high of 6.3 million barrels per day, diesel exports remain below the 10-year seasonal average, according to EIA data.
Conversely, gasoline prices have declined by approximately 30 cents per gallon in the past month, now averaging $3.58 per gallon, down from the recent near-$4.00-per-gallon average.
This drop in demand can be attributed to several factors, including the conclusion of the peak summer driving season, adverse weather conditions on the U.S. East Coast, and the relatively high summer pump prices.
Gasoline inventories have risen by 7.7% compared to the same period last year, while the four-week average of U.S. gasoline demand has decreased by 6%, as reported by the U.S. Energy Information Administration.
Consequently, profit margins for producing gasoline from crude oil, known as the gasoline crack, have dwindled by 83% since August, dropping to as low as $7.04 per barrel this month, according to LSEG data.
Despite these challenges, a glimmer of hope exists for oil refiners in the form of significantly reduced prices for the Renewable Identification Numbers (RINs) they need to purchase to comply with U.S. environmental regulations. U.S. fuel producers sold off these credits after the spread between soybean oil futures and heating oil futures widened in August.
D4 RIN credits, generated through the production of biodiesel and renewable diesel, briefly fell to 77 cents each this month, the lowest since October 2020, before rebounding to 90 cents.