On a June summer day, back in 2019, the Philadelphia Energy Solutions refinery suffered a disastrous event. Explosions rocked the refinery sending vessel fragments careening 2,000 feet across the Schuylkill River. The fire was ignited by a vapor cloud caused by the release of hydrofluoric acid and hydrocarbons in the alkylation unit of the refinery. Responsible for the refinement of roughly 30% to 35% of diesel for a large chunk of the east coast, the ultimate loss of the refinery left an indelible mark on the diesel supply crunch that we’re facing today.
Post-fire the East Coast switched to supplies from the Gulf Coast (via a pipeline), imports from overseas, and some local refineries. Diesel users were already strapped by the time Russia’s invasion of Ukraine rolled around, and that was only compounded by transportation budgets and inflationary pressures. In late June 2022, retail diesel prices boomed to an all-time high of $5.81 a gallon. The price has dropped, but the same factors that provoked the spike are firmly entrenched.
Aside from the refinery fire and Ukraine, nearly all industries deferred maintenance work during 2020 and 2021 due to Covid. Come 2022 firms were panicked to turn a profit which further kicked maintenance down the road. As a result, many refineries will need to invest in maintenance in 2023 and that will affect planning, deliveries, and budgets. For example, the Phillips 66 Bayway Refinery out of Linden, New Jersey embarked on vital maintenance work on February 2nd. The effect on output is unknown, but the industry is prepping for a slowdown. The Bayway Refinery is a critical provider of ultralow sulfur diesel that is listed on the stock exchange (New York Mercantile Exchange – NYMEX ULSD). Delays or hiccups in restarting this facility will likely result in higher gas and diesel prices in the short term.
Another bottleneck for the diesel supply is the European Union’s restriction on refined Russian products. Scheduled to begin in February, sanctions on Russian products will result in diesel imports to Europe from greater distances. Tankers will likely face capacity snafus that will raise shipping costs and the costs at the pump. Diesel prices in January were stable, thanks in large part to the Northern Hemisphere’s mild winter. Demand for heating oil is likely to climb, however, in February and potentially March as well. The overall feeling is the steep highs that were commonplace in 2022 will not repeat in 2023. But the outlook is still high prices as the supply woes are not abating.
