The Short Term Energy Outlook from the Department of Energy had good news for truckers in general and disappointing news for those companies and drivers that have seen demand for their services in the oil patch fall with the slide in the price of oil.
The STEO as it’s known is released by the Energy Information Administration monthly. It is both a review and a projection. And its projection on diesel prices is good news for companies that buy it. But its forecast on activity on the oil patch will not bring much optimism to companies that have seen demand for their services plummet.
The EIA released its October STEO on Tuesday. It does not see a significant reversal of trends that have led diesel prices to fall to historically low levels relative to crude. As a result, its forecast for diesel prices is largely a function of where the EIA sees crude oil headed.
The key benchmark to see how ultra low sulfur diesel (ULSD) and global crude benchmark Brent are doing relative to each other is the Brent-ULSD crack spread. The EIA notes in its review of September that the spread last month was 27 cents per gallon less than the five-year average for that month.
In reviewing the market, the EIA stressed that the key factor most analysts see holding down diesel relative to the rest of the barrel remains refineries avoiding making jet fuel and making diesel instead.
Both jet and diesel are distillates. With the market for jet fuel having fallen precipitously because of the pandemic, the distillate that comes out of refineries has been pushed toward diesel. And while refineries are making less distillate overall now, earlier during the start of the pandemic they had shifted production toward distillates, given the collapse in gasoline demand that by now has mostly recovered.
“Although distillate demand has declined this year jet fuel demand has declined by more,” EIA wrote in its review of the diesel market. “As a result, refiners have shifted production away from jet fuel and toward distillate, which has contributed to persistently high distillate fuel inventories and low distillate fuel crack spreads.”
With that reality looming over the market, the forecast for diesel prices becomes a crude oil function, with the EIA seeing some minuscule increase in the spread between WTI crude and diesel. For example, in the fourth quarter, the EIA is projecting an average Brent crude price of $42.34 and an average retail diesel price of $2.60 per gallon. Normalizing that to cents per gallon, that’s a $1.38 per barrel spread. In the fourth quarter of next year, the EIA sees crude up at $49 a barrel, an average diesel price of $2.60 and a spread of $1.43 per barrel, just 5 cents more than the fourth quarter of this year when the spread is already less than five-year averages.
(A small irony: The report came out on the same day that ULSD on the CME exchange rose a bit more than 5 cents a gallon, the second consecutive day of strong gains. The two-day percentage increase is 10.36%, the biggest two-day move in the benchmark ULSD contract since early June.)
That sort of market forecast by EIA, if accurate, will see the cost of fuel staying in check, rising no more than any increases in the price of crude. That’s the good news for consumers.
But business this year has been tough for companies like those that pull sand and water into the oil patch to frack wells, or flatbeds that even before fracking would carry equipment for conventional drilling.
The EIA does not see a significant increase in that activity. While it sees prices for West Texas Intermediate crude rising slightly over the next year, from $40.84 in the fourth quarter of this year up to $46 in 2021’s fourth quarter, that’s not enough to stir a significant revival in drilling.
The STEO notes that U.S. oil production has risen from its lows. Even the rig count for new drilling was higher in September than August, the first month that had occurred since the pandemic began.
And while U.S. Lower 48 production rose in the third quarter to 9 million barrels a day from 8 million in May, the EIA does not see that lasting. The forecast is for Lower 48 production to decline to an average 8.6 million barrels a day in the first half of 2021. “Most curtailed production has already been brought back online, and although EIA expects rig counts to increase in some of the most highly productive areas of the Permian region, the total (Lower 48) new drilling activity is not expected to generate enough production to offset declines from existing wells,” the EIA wrote.