Just when oil and diesel prices seemed like they were going to be an endless headwind for the trucking and transportation industry, the oil sectors of a few countries rose to the rescue.
The end result: When the average retail price of diesel posted by the Department of Energy every week hit $4.633 per gallon on Sept. 18, few could have guessed that by the end of the year, that price would be almost 72 cents per gallon lower. For the full year, the price drop was about 61 cents per gallon.
And when crude benchmark Brent moved to almost $95 per barrel in September, the broad consensus was that the magical $100/b mark was inevitable. Instead, Brent closed the year at about $77/b — and settled less than $75/b a few times in December.
The oil industry doesn’t always agree on a lot of things, but on this one, there wasn’t a lot of disagreement to a consensus view that the biggest reason for that decline was the utterly unexpected surge in output from the U.S. oil sector. Crude production in the U.S. was about 12.2 million barrels per day when 2023 started; it was 13.3 million b/d by the end of the year, according to the DOE’s Energy Information Administration. If there were any forecasters who saw that coming, they kept themselves pretty quiet.
Big gains in output from Brazil and Guyana, among others, also helped to offset the OPEC+ decision in April to cut production by 500,000 b/d, an action that was followed by Saudi Arabia saying it would cut its output by an additional 1 million b/d.
But the impact of those reductions ultimately was balanced out — and then surpassed — by the surprise increases from those key non-OPEC producers, as well as several OPEC nations doing what the group long has been burdened by: members that sign on to a quota or a cutback and then promptly ignore it. Iran was the largest producer that fell into that category in the second half of 2023.
The crude to diesel spread
But for diesel consumers, 2023 marked a year when yes, the price went up and down with the direction of the crude market. But more importantly, the spread between diesel and crude remained elevated well beyond pre-pandemic norms, raising the question whether that gap is now the new normal. That spread is not just some analytical tool. It ultimately adds a few or many cents to the retail price of diesel compared to where it would have been pre-pandemic. And in 2023, by any measure, it was many cents.
A straight spread between the front month price of Brent and ultra low sulfur diesel on CME shows that the spread actually narrowed in 2023 compared to 2022. But the 2022 figures were inflated in part by the surge in the spread following the Russian invasion of Ukraine in February 2022. The full-year average in 2022 was about $1.18/g. For 2023, it narrowed to about 85 cents per gallon. In 2019, the last relatively “normal” year, that spread was about 41 cents per gallon.
Matt Smith, lead oil analyst for the Americas at the research firm of Kpler, said he sees that diesel spread moving back toward historic norms rather than to a more permanent higher level.
“It’s just been such a tumultuous couple of years with everything that has happened with Russia,” Smith said, noting that various sanctions against Russia were levied against a major diesel exporter. “And so you will have the market recalibrate, essentially to make sure that the barrels get where they need to be or get produced where they need to be. And eventually we believe we will see that crack come down. It is just going to take a fair bit of time.”
A big new refinery in Nigeria
Any discussion of oil products going into 2024, whether they be diesel, gasoline, jet fuel or anything else, eventually gets back to the white whale on the horizon: the Dangote refinery in Nigeria, which as 2024 starts is taking in crude to begin its operations after years of delays.
The giant 650,000 b/d refinery, one of the world’s largest, is expected to start operations at less than 400,000 b/d of crude throughput. Robert Auers, a refined fuels market analyst with RBN Energy, noted that Dangote is engineered to produce a gasoline-heavy output, not surprising given the light sweet crude that is predominant in Nigeria’s daily production of 1.5 million b/d, a figure that is well below previous output in the always inefficient Nigerian industry.
While the new refinery will produce diesel, Auers said the prevalence of gasoline output will impact diesel markets. “If they’re going to make a lot of gasoline, that would push diesel cracks even wider.”
He said RBN’s estimates are that global demand for middle distillates like diesel will rise 300,000 b/d in 2024, and given that gasoline supply is going to get a bigger boost out of Dangote than diesel, a $30/barrel spread of diesel over gasoline is not likely to drop below $20 in 2024.
Smith said Kpler sees total refinery capacity additions this year totaling 1.4 million b/d, including Dangote.
The outlook for renewable diesel
A growing source of diesel supplies in recent years has been renewable diesel (RD), especially on the West Coast. RD, unlike biodiesel, is a drop-in fuel that is heavily processed in a refinery and can be substituted on a one-for-one basis for petroleum diesel. A truck filling up with diesel in California is increasingly likely to be consuming RD without even knowing it.
David Hackett, president of Stillwater Associates, a West Coast-based transportation fuels analysis firm, said RD has been “the real success story of the low-carbon fuel effort.” Not only is its carbon footprint less than petroleum diesel, because its source are things like animal fats, restaurant grease and soybean oil, but “it’s really clean-burning stuff,” Hackett said. “It’s got great performance. Users like it.”
But the tremendous growth of RD production led by several refiners building new facilities, particularly on the West Coast, may be facing a shift in the plants’ economics that will deter future investment.
Megan Boutwell, the president of Stillwater, noted that credits for the production of low-carbon fuels under California’s Low Carbon Fuel Standard (LCFS) have dropped to about $70 per ton, a long slide that began at the beginning of 2021 near the price cap for the LCFS of $200/ton.
The LCFS is a system of carrots and sticks to incentivize the production of low-carbon fuels, like RD, that includes the ability to generate sellable credits if a company produces a low-carbon transportation fuel, like RD.
Boutwell said the decline in LCFS credit prices is impacting capital flows into some projects to produce RD, because those plans were drawn up when LCFS credits were more than current levels. The price of those credits is a key part of the economics of a plant.
(Source: Neste)
She added that the number of LCFS credits being generated is adding to the “credit bank,” a sign of success in reducing the carbon intensity of California’s transportation fuels, but also pushing down the price to a level that may discourage future investments. The state in response, according to Boutwell, has recently announced several changes that will “drastically increase the deficit.” The goal is to boost the price of LCFS credits and support future investment.
Boutwell also downplayed concerns about an adequate supply of feedstocks to grow RD supplies in the future. “There’s enough demand for this product that the market will figure itself out,” she said. “There are innovative feedstocks out there.”
Looking at the macroeconomic picture for the supply and demand balance, Kpler’s Smith said most projections are for crude to be in surplus for at least the first third of the year.
“That’s why you had Saudi Arabia come out and extend its [1 million b/d] cut,” Smith said, adding that Kpler expects the Saudi reduction to ultimately be in place for all of 2024.
In its most recent monthly production survey of OPEC+ output, S&P Global Commodity Insights estimated Saudi output at 9 million b/d. In January 2023, SPGCI estimated Saudi output at 10.42 million b/d.
Smith said Kpler’s estimate is that global demand growth in 2024 will be 1.2 million b/d; the International Energy Agency sees it at 1.1 million b/d. But that comes after a year in which the IEA said demand rose by 2.3 million b/d.
That level of growth is “pretty good,” Smith said. But given that supply imbalance fueled by countries where output keeps rising, “we’re expecting prices to remain fairly soft through the first half of next year and start picking up in the second half of the year.”
One addendum: while the war between Hamas and Israel has not had any impact on oil production in the Middle East, the rerouting of tankers around the Cape of Good Hope and away from the Red Sea and Suez Canal locks oil into lengthier inventory while it is being shipped. That’s a bullish factor. As always, geopolitical remains an oil market wild card.
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