America is facing a dramatic diesel shortage that could get even worse
Good morning markets people, I'm senior reporter Phil Rosen. If you're like me, breakfast this morning consists of the Halloween candy you "forgot" to leave out for trick-or-treaters last night. (Don't worry, I won't tell anyone.)
Or maybe, you loaded up ahead of time so you could meet the rush and have leftovers.
Econ 101, really — when demand overruns supply, there's trouble (i.e. no spare candy).
And when stockpiles can handle a seasonal surge (i.e. trick-or-treaters), there's more wiggle room and less urgency.
This is what we're covering today, albeit with slightly higher stakes. America's in the midst of one of its worst diesel shortages ever thanks to lopsided supply and demand.
Hold on to your M&Ms because today we're diving into the crisis.
And two items to keep on your radar: Job openings data for September comes out this morning, and the Federal Reserve kicks off its two-day policy meeting today, which many expect will culminate with another 75-basis-point rate hike.
1. The diesel shortage has been building since the start of the pandemic, and fuel inventories have dropped well below emergency levels.
The Energy Information Administration has said the US has only 25 days left of diesel reserves — and that was two weeks ago. Stockpiles are hovering below marks not seen since 2008.
So how did we get here? That's what I asked Matt Smith, lead oil analyst at Kpler. He told me it comes down to basic supply and demand.
- The pandemic abruptly halted gas demand, since people were forced to stay home.
- With demand crashing, refiners stopped refining.
- But trucks continued to deliver goods around the country, so diesel demand stayed elevated.
In effect, diesel consumption continued but refiners largely slowed down production.
The crisis has since gotten worse because of two additional factors at play.
"The double whammy is that, as demand has picked up post-pandemic, the US is exporting more, well over a million barrels a day," Smith explained. "And the triple whammy is the sanctions coming onto Russia's diesel exports early next year, so the global backdrop is tight supply."
With European nations weaning off Russian energy, competition has increased in the diesel market due to the influx of buyers.
Notably, Smith said, it's unlikely inventories actually bottom out at zero. Markets are panicking, so diesel prices will climb higher and higher, which will spark behavioral changes in consumers and producers.
"Higher prices make the profitability of refining diesel go much higher," he said. In other words, refiners have more incentive to ramp up production.
At the same time, expensive diesel will mean fewer customers can afford to keep buying fuel.
"So prices rise, which crimps demand, and that also crimps export demand and encourages import demand," Smith said. "The market is having to adjust very quickly to avoid inventories running dry. The mechanism to do that is simply through diesel prices rising."
Will the US's worsening fuel shortage impact the outcome of the midterm elections?
2. European stocks and US futures rise early Tuesday. Meanwhile, oil is also up, as BP reported a quarterly profit of $8.2 billion while giant Saudi Aramco's quarterly profit surged 39%. Here are the latest market moves.
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5. The US is reportedly prodding European allies to impose trade sanctions on China. They would come in the form of export controls, similar to those currently being used against Russia, according to Bloomberg. Some EU officials have expressed openness to sanctioning goods to limit China's military, as well as to bolster other trade-protective measures.
6. A planned price cap on Russian oil could be delayed, according to a Wall Street Journal report. Policymakers could postpone the move to try and smooth market volatility ahead of midterm elections, sources told the Journal. Here's what you want to know.
7. Lloyd Blankfein reminded investors that plenty could still go right to send the stock market higher. "Positives may be lurking," he tweeted. Those include a potential Fed pause, Ukraine-Russia truce, and the end to China's COVID-19 lockdowns. His reasons for optimism come amid overwhelmingly negative sentiment.
8. Wall Street's biggest banks said Amazon is still a screaming "buy" despite its ugly earnings results. Amazon's chief financial officer said the company was taking action to "tighten our belt" the day before slashing 150 roles. Here's why experts are still betting on the retail giant — and where they see future growth coming from.
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