Diesel Fuel Getting Cheaper Than Gasoline (MRO, VLO)

For the past couple of years, diesel fuel prices have been higher than gasoline prices. In the US, that is a real anomaly. Now, industry observers are predicting a return to normalcy, with prices for diesel fuel dropping below gasoline prices by April.

Bloomberg noted that gasoline prices at US pumps are rising because the WTI benchmark crude is now selling at a discount to most other widely available crudes, and WTI is not available to most areas of the US outside of Texas. The US Energy Information Administration figures for the week ending February 13th show that WTI sold for $39.42/barrel. In the same week, North Sea Brent sold for $45.17/barrel, Nigerian Bonny Light sold for $48.79/barrel, and even Arab Light sold for $39.49/barrel.

Because WTI is captive in Texas, refiners in other regions of the US are buying from higher priced sources, driving up costs and ultimately prices. As long as WTI is priced lower than other crudes, US drivers will pay more at the pump.

Conversely, diesel prices are falling as a result of a milder than usual winter which has left heating oil stocks at higher than normal levels. That means that more crude can be refined into nearly identical diesel fuel. Supplies of diesel will rise quickly, but demand is not likely to follow unless the economy picks up. And no one expects that to happen at least until the second half of the year.

The reversion to higher gasoline/lower diesel prices is not expected to last, mainly due to demand for diesel in Western Europe, where diesel-powered automobiles currently account for 53% of new car sales. Refiners like Marathon Oil Company (NYSE:MRO) and Valero Energy Corporation (NYSE:VLO) are expanding their diesel capacities to meet the expected global demand.

Once diesel prices drop below gasoline prices, they are expected to stay there for a few months. US railroads and trucking companies, especially, are expected to get some relief from high diesel prices. But that condition is not expected to last beyond the beginning of the 2009-2010 heating season. Strong global demand for diesel will keep supplies of the fuel tight, and refiner margins up. Diesel fuel, not gasoline, is where the money is right now.

Paul Ausick
February 24, 2009