We have just 25 days of diesel supply as we head into winter

(Bloomberg) — The diesel shortage that had the White House on edge last week is spreading from the Northeast to the Southeast, prompting at least one supplier to initiate emergency protocols. 

“Because conditions are rapidly devolving” fuel supplier Mansfield Energy is now requiring a 72-hour notice for deliveries to secure fuel and freight, according to a note to customers. In areas that are tightest, fuel prices are running 30-80 cents higher than the market average, Mansfield said, adding that Tennessee is “seeing particularly acute challenges.”

“At times, carriers are having to visit multiple terminals to find supply, which delays deliveries and strains local trucking capacity,” the note said.

Diesel inventories nationwide are at lowest seasonal level ever heading into winter, and some areas in the Northeast have already started rationing fuel. The shortage is almost certain to drive up prices for the heating and trucking fuel, further straining household budgets. 

U.S. diesel fuel stocks have been on a stable decline for months, reaching the lowest level since 2008 as of October. Currently, the United States only has 25 days of diesel supply in reserve.

Bloomberg noted in its report that the Colonial Pipeline has been fully booked to carry diesel fuel and other distillates to the East Coast, which should ease the supply pressure but it will take a while, with the first deliveries expected in early November.

Earlier this week, Goldman Sachs warned that the diesel shortage, which is not confined to the U.S. only but is spreading in Europe as well, will cause higher fuel prices this winter.

In the U.S., the bank said, underinvestment in refining capacity and refinery closures and operation disruptions have all contributed to the scarcity of refined oil products this year but especially diesel, Bloomberg says oilprice.com.

What’s causing the crunch?

Unlike gas and jet fuel, demand for diesel recovered at a much faster pace from the pandemic. Diesel is used for transporting goods as well as powering construction, farming and military vehicles and equipment.

In 2021, the U.S. transportation sector alone consumed 46.82 billion gallons, or 1.11 billion barrels of distillate fuel (essentially diesel fuel) — at an average of about 128 million gallons a day.

Strong domestic and international demand, shrinking domestic refining capacity and sanctions on Russian petroleum imports have kept the diesel market tight throughout the year.

New England’s stockpiles have been depleted to less than a third of its usual levels for this time of year, which is concerning since those states rely on fuel for heatingmore than other parts of the country.

The national average price of diesel as of Oct. 24 is at $5.34 a gallon — $1.63 more than last year.

What are the government’s options?

If diesel inventory continues to run down without the government intervening, the impact on transportation costs for goods could drive inflation up even further.

Deese adds that the Fed has some tools to bolster diesel supply, like the Northeast Home Heating Oil Reserve, a one million barrel supply of ultra low sulfur distillate (diesel) that provides protection for vulnerable homes and businesses in the densely populated northeastern United States should a disruption in supplies occur.

“We have looked very carefully at being prepared to deploy as and when necessary,” he said.

Diesel demand is so high, that it’s estimated that if a million barrels of diesel were delivered from the Northeast reserves, they would be depleted in less than six hours. Things are so bad that traders are diverting Europe-bound tankers carrying diesel to the U.S. East Coast as the two regions battle for supplies amid an acute shortage and soaring prices. At least two tankers carrying 90,000 tonnes of diesel and jet fuel are heading from Europe to the U.S. East Coast, according to traders and Refinitiv ship tracking data.