The White House has become increasingly aware of the “worrisome decline” in diesel inventories in the Northeast. According to sources cited by CNN, the White House is considering a release of strategic stockpiles to combat the crisis. Given the reduction in East-coast diesel inventories of ~45mb, and given the size of the strategic “home heating oil reserve” of ~1mb, its unlikely the measure will fix existing imbalances.
Several weeks ago, it appeared a variety of factors were contributing to oil product shortages brewing in the Northeast. Reduced Russian and Chinese oil product exports led to rising US oil product exports from the Gulf Coast to Europe. Dramatic reductions in refining capacity in the Northeast, left domestic consumers in a bidding war against Europeans for diesel and gasoline. Noting that the Colonial pipeline, an oil product pipeline connecting the Gulf to the Northeast, was running without apportionment for the first time in recent history, it appeared consumers in the Northeast were losing the bidding war and inventories began to draw rapidly.
Since the phenomena was flagged, Chinese diesel production rose 14% in April; however, diesel exports collapsed 81%. Congress since proposed legislation to cap oil product prices, at the President’s discretion. If Chinese export curtailments are sustained, and price caps are implemented, both factors could lead to increased oil product exports. While releasing the “home heating oil reserve” of 1mb could paper over structural imbalances for several weeks, it would likely leave consumers of home heating oil in a difficult position come winter.
Investors in the refining sector are likely to remain laser focused on policy from Washington. Rising export demand and declining inventories create a bullish backdrop for domestic refiners like Valero (VLO), Philips (PSX), and Marathon (MPC), as well as integrated names like Exxon (XOM) and Chevron (CVX). However, policy measures ahead of midterm elections could become a headwind. The release of 1mb of “home heating oil” reserves will not change the underlying factors driving diesel margins to record highs. Gasoline price caps are also unlikely to be implemented at a scale that would impact margins. However, both measures increase the probability of domestic shortages, and thus raise the likelihood of an oil product export ban. A measure that would pose huge challenges for European allies, but also domestic oil refiners.
Originally Posted on: https://seekingalpha.com/news/3841709-white-house-considers-burning-home-heating-oil-reserve-to-reduce-diesel-prices?source=feed_tag_commodities