US oil refineries are increasing their production of diesel, heating oil, and jet fuel for the winter season, but they are grappling with profit challenges as gasoline margins have dropped by over 80% since the conclusion of the summer driving season.
Refineries, which traditionally produce higher volumes of distillates like diesel and heating oil in the autumn, are aiming to replenish their inventories of these fuels, which are currently near seasonal record lows. However, as they prioritize distillate output, they inevitably produce more gasoline, leading to an oversupply of gasoline amid sluggish demand.
Meanwhile, factors such as Russia's brief diesel export ban, reduced refinery capacity, and Western sanctions on Russian diesel have impacted diesel inventories and tightened supplies.
In September, US distillate fuel oil inventories averaged 21 million barrels below the prior 10-year seasonal average. European distillate inventories were 25 million barrels below their averages, and Singapore's distillate stocks averaged 3 million barrels below their averages.
This shortage has driven the US heating oil crack to nearly $44 a barrel, almost double the seasonal average. In response to this, demand for distillates in the US reached its highest level in a year last week.
US refineries have significantly increased their exports of diesel and heating oil, with exports reaching 6.6 million barrels in September, the highest in over a year. The four-week average of US exports of petroleum products also rose to 6.3 million barrels per day (bpd), close to the all-time high reached during the summer. However, diesel exports are still below the 10-year seasonal average, according to data from the US Energy Information Administration (EIA).
Gasoline prices have declined by approximately 30 cents per gallon in the past month, reaching $3.58 per gallon, down from nearly $4.00 per gallon just weeks ago. Factors contributing to reduced gasoline demand include the end of the peak summer driving season, adverse weather conditions on the US East Coast keeping drivers off the road, and relatively high pump prices during the summer.
Gasoline inventories have risen by 7.7% compared to the same period last year, while the four-week average of US gasoline demand has dropped by 6%, according to the EIA.
Consequently, profit margins for producing gasoline from crude oil, known as the gasoline crack, have plummeted by 83% since August, reaching as low as $7.04 per barrel this month.
One silver lining for oil refiners is the sharp decline in the prices of credits they must purchase if they do not produce enough biofuels to comply with US environmental laws. US fuel makers have sold these credits, known as Renewable Identification Numbers (RINs), to lock in profits after the spread between soybean oil futures and heating oil futures widened significantly in August. Biomass-based (D4) RIN credits, generated through the production of fuels like biodiesel and renewable diesel, have traded as low as 77 cents each this month, the lowest since October 2020, before rebounding to 90 cents.