As the U.S. driving season is ending and the heating season approaches, focus shifts to the middle of the barrel. The observer would find that absolute U.S. distillate stock levels are critically below the seasonal norm – apart from last year when waning Russian diesel exports caused panic buying amongst European consumers. The current level of 118 million bbls is only 86% of the comparative week of 2021. In fact, present distillate inventories show a sizeable deficit to every corresponding week of the 2015-2021 period. Stockpiles in this product have been under the five-year norm every single week since April 2021 with the current gap at -13%.

The main culprit is the Ukrainian conflict and the resultant sanctions on Russian crude oil and product exports. The impact of the conflict and the collective boycott is neatly manifested in U.S. distillate export figures. Total U.S. distillate exports averaged 1.175 mbpd year-to-date and 1.257 mbpd in 2022. These compare with 988,000 bpd in 2021. The impact of the conflict in the heart of Europe is tangible.

The question, therefore, is what to expect for the remainder of the year, especially given that the CME Heating Oil contract corrected sharply lower towards the end of last month. Despite this retracement the outlook remains one of tightness. Firstly, Russian diesel exports declined sharply in August and the trend is expected to continue going forward. Diesel shipments from the Russian port of Tuapse, for example, will see a monthly drop of 8.6% in September. These barrels need to be replaced and one of the options is the U.S. The problem is that domestic refiners are running hard. The recent four-week average utilization rate is above 94%. Additionally, maintenance works are constraining capacity. Secondly, U.S. consumption of distillates will increase 240,000 from Q3 to Q4 this year. This extra domestic demand will compete with Europe, which is structurally short in the product, again, due to western sanctions on Russia. Lastly, a colder-than-average winter in the northern hemisphere would provide another layer of support.

Outright prices are influenced by a myriad of factors and might not be able to remain resilient in the coming months. The current snapshot, however, implies that distillate will show its relative strength shortly again and will perform resolutely compared to other refined products for the rest of 2023.