Low U.S. diesel inventories ‘troubling’ as winter looms. Will Canada be impacted?

Diesel prices in Canada and the United States remain elevated as U.S. inventory levels for the fuel sit at their lowest level in decades.

Last week, the U.S. Energy Information Administration (EIA) reported that distillate inventories were at their lowest levels since 2008. Distillate fuels include diesel and heating oil.

Diesel, which has been dubbed the “fuel that powers the economy” by experts who previously spoke to Global News, is relied upon not only by drivers, but industries such as farming, transportation and shipping.

Demand for diesel fluctuates throughout the year, but to see U.S. distillate inventories at record lows for this time of year is “troubling,” said Carol Montreuil, vice president of Eastern Canada and economics at the Canadian Fuels Association.

“We are in the middle of an energy crisis,” he told Global News.

“U.S. inventories are down … compared to the usual numbers that we would see at this time of the year at the start of the heating season.”

During the fall and winter, the demand for heating oil affects diesel fuel prices, the EIA said on its website. As both fuels are produced at the same time, seasonal increases in heating oil demand can also put pressure on the diesel market. In some areas, seasonal swings in farmers’ demand for diesel can influence prices.

Throughout the year, oil producers have had challenges keeping up with unprecedented demand for fuel as the world began to emerge from COVID-19 lockdowns. Furthermore, Russia’s war in Ukraine has shaken the global economy as western nations move to punish Moscow with sanctions, and distance themselves from relying on Russian oil, which has increased demand for oil elsewhere.

As Europe tries to move off of Russian oil, North American nations have been sending over distillate fuels like diesel and heating oil ahead of the winter, said Montreuil. Several European nations have stockpiled resources and rationed energy over the summer to ensure supply of materials for the winter months.

“That is the reason why inventories in North America, both Canada and the U.S., have been trending down as we speak,” he said. The low distillate inventories are also why U.S. diesel prices are averaging above US$5 a gallon.

Refineries, which are under much pressure to keep up with demand, lack the additional capacity right now to produce enough diesel and heating oil to ease demand, said Patrick De Haan, head of petroleum analysis at GasBuddy, in a Global News interview last week.

“Diesel and heating oil may just be entering their more challenging time of year,” he said.

Canada is a large producer and net exporter of diesel, including to the United States, which has an integrated energy market, a spokesperson for Natural Resources Canada told Global News in an email.

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According to the most recent data from Statistics Canada from July 2022, diesel inventory levels in Canada have been stable over the past year, they added.

U.S. distillate fuel inventories increased by 400,000 barrels last week and are about 19 per cent below the five-year average for this time of year, the EIA said on Wednesday.

“The economy, irrespective of the spectre of maybe a recession or a reduction of the strength of the economy, demand is still very high for all sectors of the economy, which means that diesel demand is high,” said Montreuil

“Now we’re going into the heating season where demand for heating oil will be as high as well.”

Low diesel inventories in the U.S. are likely to continue driving up prices for Canadian consumers.

“The fate of diesel and heating oil may be for a higher price future,” De Haan said.

On Wednesday, Canada’s average price for diesel was $2.18 per litre, according to data provided by GasBuddy, compared to $1.43 a litre one year ago. Diesel prices have soared throughout the year, at one point averaging $2.74 in Newfoundland and Labrador. Diesel prices at the pumps historically have been cheaper that gasoline.

The highest diesel prices in Canada on Nov. 2 were $2.44 a litre in Quebec, $2.40 per litre in Newfoundland and Prince Edward Island, $2.30 a litre in New Brunswick and $2.28 per litre in Nova Scotia. Diesel prices can vary in different parts of the country for various reasons including provincial taxes, said Montreuil. The government of Newfoundland currently taxes 9.5 cents per litre for diesel, whereas Quebec charges 20 cents a litre on diesel.

Elevated diesel prices will not only impact drivers, but Canadians shopping at the grocery store, for example, as many goods are transported on vehicles with diesel engines, said Montreuil.

Furthermore, homeowners in Canada who still use heating oil will feel the pinch. But how high prices go will depend on a number of factors such as inflation and bans on using Russian oil, Montreuil said.

High gas prices were a significant driver of overall inflation earlier in the year. But as gas prices dropped over the summer, so did the headline inflation figure. However, with overall inflation still sitting at 6.9 per cent – far above the Bank of Canada’s two per cent target – the central bank continued on its rate-hike path last week, making it even more expensive for Canadians to borrow.

If the economy were to slow down as central banks try to tame inflation, demand for energy could ease and diesel prices could drop, Montreuil said. But there are other factors at play that could influence the trajectory of diesel prices.

One of them is a looming European ban on most Russian oil imports that is set to go into effect next month. In addition, a move by the U.S., Canada and other G7 nations to impose a price cap on Russian oil that month could reduce supply if Moscow retaliates by refusing to ship to countries and companies that observe it.

In 2021, Russian oil output reached 10.5 million barrels per day, making up 14 per cent of the world’s total supply, according to the International Energy Agency’s website.

Also, if a bad winter strikes Europe and North America, demand for energy could increase if consumption spikes as people try to stay warm, Montreuil added.

These “are the three key variables to follow very closely,” he said.

“No one has a crystal ball to predict where these three variables are going. Not knowing the outcome of these three variables does not allow us to estimate where prices could be. Suffice to say that already we’re in record territory.”