Diesel to Climb as Record Planting Eats at Inventories

Diesel prices are surging in the U.S. Midwest as farmers prepare to plant a record amount of crops this season, eating into below-average fuel supplies.

Farmers may sow 174.4 million acres of corn and soybeans this year, boosting output by 30 percent, the Agriculture Department forecast. Midwest prices are at the highest seasonal premium to the Gulf Coast since 2007. The Energy Information Administration estimated agricultural distillate fuel use will rise 5.1 percent in 2013 to the most since 2010.

Demand for fuel to run tractors and combines is growing as the U.S. attempts to recover from last year’s drought, the worst since the 1930s. At the same time, refinery maintenance may limit local production, pushing prices higher to entice suppliers to ship diesel north by pipeline from the Gulf Coast rather than send it abroad.

“Farmers are going to be planting fence to fence this year,” Steve Mosby, vice president of supply consultant ADMO Energy LLC, said in a phone interview from Kansas City, Missouri. “We’re looking at huge demand in a year that supply is really off. Prices are going to explode.”

Ultra-low-sulfur diesel in the Midwest, or the Group 3 spot market, was 4.5 cents a gallon above futures on the New York Mercantile Exchange yesterday, compared with a 2.75-cent discount in the Gulf Coast, data compiled by Bloomberg show. The Group 3 includes states north of Tulsa, Oklahoma, to Minnesota and North Dakota along Magellan Midstream Partners LP’s pipeline system. ULSD futures increased 2.96 cents to settle at $2.8413 a gallon in New York.

Record Acres

Fuel demand may surge as early as May, when many Midwest farmers begin to sow fields for the September and October harvest season. Growers intend to plant 97.3 million acres of corn, the most since 1936, and 77.1 million acres of soybeans, the Agriculture Department reported March 28.

The agricultural sector will probably use about 141,572 barrels of distillate fuel a day, compared with 134,752 barrels in 2012, EIA data show. U.S. farms and ranches typically use this fuel to power tractors, combines and other equipment.

Farms’ cash expenses may rise to $316.6 billion, with fuel accounting for 5 percent of spending, or $15.7 billion. Costs have averaged $14.4 billion a year since 2009, the data show.

“We should see an increase in planted acreage this year and that’s the biggest factor in fuel spending,” Chris McGath, an agricultural economist of the economic research service at the Agriculture Department, said by phone from Washington. “There will be a lot of consumption.”

Illinois, Iowa, Nebraska and Minnesota may consume the most fuel as the states are expected by the government to plant the largest number of corn and soybean acres this season.

Wide Differential

“Once planting begins in the Midwest, we expect those prices are definitely going to rise and the differential to the Gulf Coast will stay wide,” Ed Malloy, president of Danaher Oil Co., said in a phone interview from Fairfield, Iowa.

Planting was slowed as heavy rain last week spurred flooding along rivers. Storms on April 17 and April 18 in the northern Midwest dropped 5.4 inches (14 centimeters) of rain on Chicago and as much as 6 inches on part of Eastern Iowa, according to

Corn planting in the largest U.S. producing states was 2 percent complete as of April 14, compared with last year’s pace of 16 percent, Agriculture Department data showed. No corn was seeded in Iowa, the biggest producing state.

Refinery Turnarounds

Inventories of distillate fuel in Petroleum Administration Defense District 2, which covers an area from Oklahoma north through North Dakota and east through Ohio, were 28.8 million barrels as of April 19, 8.3 percent less than a year earlier, EIA data show. PADD 2 refiners processed 3.14 million barrels a day of crude, the fewest in two years.

Phillips 66’s Wood River, Illinois, and BP Plc’s Whiting, Indiana, plants, the two largest in PADD 2, have had units shut for maintenance. HollyFrontier Corp.’s Tulsa, Oklahoma, refinery plans work this quarter, joining Calumet Specialty Products Partners LP’s Superior, Wisconsin, plant and Exxon Mobil Corp.’s Joliet, Illinois, site that have begun turnarounds.

“There has been a lot of turnaround going on in the PADD 2 region and it’s still unclear as to when we’ll see Whiting producing at full rates again,” Chris Barber, a senior analyst at Energy Security Analysis, Inc. in Wakefield, Massachusetts, said by phone. “That’s definitely going to make a difference and continue to take supply offline.”

Chicago Premium

The spread between diesel in Chicago and the Gulf Coast was about 16.75 cents a gallon, the highest level for this time of year since at least 2006. Chicago ULSD has averaged 0.84 cent a gallon over the Gulf Coast around this time of year since 2008, compared with 1.21 cents a gallon for Group 3, according to data compiled by Bloomberg.

It costs about 4 cents a gallon to ship diesel from the Houston area to Tulsa and about 7 cents to ship it to Chicago on the Explorer pipeline, based on tariff data on Explorer Pipeline Co.’s website.

Chicago was 8.14 cents over Group 3, making it a more attractive destination for supplies shipped north from the Gulf.

“The turnarounds in Chicago have driven the supply side of the picture and pushed prices higher in the region,” Malloy said. “There’s a big arbitrage between Chicago and the Group 3 in distillate.”

Refineries on the Gulf Coast sent 2.7 million barrels of distillate to the Midwest by pipeline, tanker or barge in January, according to EIA data. In the same month, 19.8 million barrels were exported from the Gulf.

Latin Competition

“The Midwest is really going to have to compete on price if they want those barrels because Latin America needs that fuel and the Gulf generally exports most diesel,” Barber said.

Latin America is likely to use 7.01 million barrels a day of fuel in the second quarter, 4 percent more than a year earlier, the EIA estimated April 9.

“We should have enough distillates on the Gulf Coast to satisfy foreign demand and Midwest demand,” said John Auers, senior vice president of Tuner Mason & Co., a petroleum and refining consulting firm in Dallas. “If we’re short diesel and there’s demand, the reaction will be an increase in diesel prices and the barrels will come up from the Gulf.”

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE