June 10, 2020 / 5:38 PM / a month ago

U.S. refiners forced to buy diesel in Midwest to fulfill contracts: traders

NEW YORK (Reuters) - Spot prices for diesel in the U.S. Midwest have risen this month as refiners running at reduced rates have bought fuel to fulfill contracts and make use of storage plays, traders said.

Because refiners in the Midwest are running at substantially lower levels than normal, they have had to buy diesel on the open market because some cannot fulfill contracts with their current production, traders said. Currently, refiners in that region are running at just 75.9% of capacity, according to U.S. Energy Information Administration data.

Although diesel stocks are high, at a near record 37.1 million barrels in the Midwest, refiner demand has caused cash differentials - the difference between regional prices and the heating oil benchmark - to rise by 50% since the beginning of June.

When governments imposed stay-at-home orders to curb the spread of the novel coronavirus, gasoline demand plummeted. Initially, however, diesel fuel held up, and refiners switched to produce as much diesel as possible to maximize profits but ended up oversupplying the market.

Margins to refine distillates from crude oil have tanked over the last month, falling to $9.78 a barrel, the lowest seasonally since at least 2010, Refinitiv Eikon data showed.

Diesel demand is currently 18% below the year-ago, four-week average, EIA data shows, as the lockdowns have disrupted manufacturing and construction activity around the United States, with many projects slowly restarting.

Diesel cash prices in Chicago traded at 4 cents a gallon below heating oil futures, up from 12 cents per gallon below futures on June 1, traders said. Group Three diesel, a market that covers Midwest states including Oklahoma, traded at 6 cents a gallon below futures, up from 12 cents a gallon below futures.

Reporting by Stephanie Kelly; Editing by Cynthia Osterman

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