Diesel Gets a Boost After Hurricane Harvey

By Christopher Alessi Features Dow Jones Newswires

In the wake of Hurricane Harvey a tarnished fuel is getting a boost: diesel.

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The price of diesel futures has risen roughly 10% since Harvey tore into the U.S. Gulf Coast and shut down refineries and ports through which this fuel usually flows abroad. This has contributed to a shortfall of the fuel in Europe, a region with massive diesel appetites for passenger cars.

Diesel's image took a big knock two years ago when Germany's Volkwagen AG admitted it had rigged millions of diesel cars to cheat environmental regulators, which ultimately revealed diesel engines as far bigger polluters than originally thought. That triggered a political backlash in Europe, but because the fleet of cars on the continent is largely diesel, demand has remained high.

Europe's domestic production came up short by around 900,000 barrels every day between January and June of this year, according to JBC Energy GmbH. The U.S. had been supplying about 250,000 barrels of that shortfall. The gap is expected to widen in the coming weeks by about 200,000 barrels a day year-on-year, according to James McCullagh, an oil products analyst at Energy Aspects Ltd.

"Before Harvey, Europe was looking to the U.S. [Gulf Coast] for extra barrels to help cover its import requirements this autumn," Mr. McCullagh said.

Russia, a traditional supplier of diesel to Europe, is unlikely to be able to step in. Its refineries are in the midst of heavy seasonal construction and maintenance work, experts say. Initial data shows that refined products from the Middle East and Asia to Europe are rising, according to Lisa Ward, co-founder of TankerTrackers.com, a website that records oil tanker movements.

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But just as Europe hungers for diesel imports, cargoes of this fuel have been heading out of local European ports to Latin America over the past week, according to Energy Aspects. Latin America usually feeds its diesel appetite with imports from the U.S., so European refiners may be making up the Harvey-induced shortfall at a hefty profit, analysts say.

The global shortage is a boon for the refiners who convert crude oil into diesel. So-called diesel cracks -- a proxy for refining margins -- have risen to their highest levels in two-years, at around $16.50 a barrel against Brent crude oil.

To capitalize, expect refiners to switch more of their production to diesel from other oil products, said Michael Dei-Michei, head of research at JBC Energy.

While experts believe these shifts won't be permanent, they could have a significant impact on diesel flows and prices over the next few weeks or months.

Even as U.S. refineries come back online it will take time before they are able to export at their previous levels.

Moreover, the "reconstruction of areas affected by Harvey will also result in higher U.S. demand for distillates [like diesel], limiting export capacity," said Ehsan Ul-Haq, director at Resource Economist Ltd. That could be simply as construction vehicles and equipment boosts demand for such fuels.

Diesel isn't the only fuel to benefit from Harvey. Gasoline prices rose by roughly 14% last week but have since fallen back to levels before the storm knocked out U.S. refineries, sparking fears of a gas shortage across America. European refiners stepped in to meet U.S. demand for gas, especially on the East Coast, and have also reaped the benefits of record high margins in this business.

Write to Christopher Alessi at christopher.alessi@wsj.com

(END) Dow Jones Newswires

September 07, 2017 02:44 ET (06:44 GMT)