Yesterday, we published a supply alert for the East Coast based on dwindling inventories and tightening supplies. Much of the supply challenge is caused by backwardation – with future diesel prices trading below current levels, those holding fuel inventories lose money if they carry more fuel. This has been particularly challenging in the Southeast, impacting states including Georgia, North Carolina, and Virginia.
Adding to complexity on the East Coast, New York Harbor diesel prices are skyrocketing, with recent NYH basis trading at 95 cents over the NYMEX. Basis is the difference between the June NYMEX ULSD contract (4.1602 in the chart above) and current physical prices. Since the NYMEX trades based on fuel delivered to New York Harbor, there is no geographic difference – just a time difference.
What’s going on in this area? Well, let’s take a step back and look at the New York Harbor supply map. The region has a few small refineries, but much of the fuel coming into the region is either shipped from the Colonial Pipeline into New Jersey or imported from overseas. A small amount of product is shipped into western Pennsylvania from various pipelines, but getting supply from Pittsburgh to the coast is a difficult endeavor given a lack of east-flowing pipelines.
The focal point here is imports and exports. In a situation that OPIS has labelled a “Middle-of-Barrel Crisis”, diesel supplies are in higher demand worldwide as Russia supply declines. Since the beginning of the Russian-Ukraine conflict, US East Coast imports have plummeted from 400 thousand barrels per day (kbpd) to below 100 kbpd. Although this isn’t an unusual seasonal decline, it comes as markets are desperate for more product. Europe doesn’t have enough excess supply to ship to the US; in fact, Europe and Latin America are now importing more from the US. Between fewer pipeline shipments on the Colonial Pipeline due to market backwardation and sinking imports from overseas, expect that New York Harbor and surrounding markets will continue experiencing elevated prices.