New York diesel is so scarce, traders are turning to unusual source

DIESEL has become so tight and so expensive that East Coast suppliers are turning to an unusual source to stock up: the New York Mercantile Exchange.

Record-low seasonal inventories and rising demand ahead of the winter heating season has propelled New York Harbor diesel fuel to its highest premium over Nymex futures in five months. Instead of paying this premium on the spot market, currently at 62.5 US cents a gallon, more traders are planning on taking physical delivery of the fuel a week or two after contract settlement at the end of each month, according to traders.

The futures market is not designed to be a source of physical supply, and traders typically prefer financial settlements to avoid having to receive fuel – the vast majority of futures traders do not have access to storage.

The change of strategy highlights just how tight the market is for the fuel used to transport goods around the country and to heat homes in the Northeast. 

When the Nymex October diesel contract expired, some 291 contracts, or 291,000 barrels, were marked for delivery, according to latest CME data. Deliveries reached a high for the year at 728,000 barrels when the February contract rolled off, data show.

Resupply isn’t easy. The East Coast’s refining capacity has steadily declined over the years, while Europe, a key swing supplier to the region, is facing its own diesel crisis.

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A wide backwardation – where next-month deliveries are priced at deep discounts to prompt deliveries – means cargo and pipeline shipments of fuel stand to lose value after a few weeks in transit.

As a result, the main pipeline connecting fuel makers on the US Gulf Coast and consumers on the East Coast remains underused despite the Gulf Coast surplus being exported at a great rate. BLOOMBERG