The EIA (U.S. Energy Information Administration) reported diesel fuel prices at $2.49 per gallon on November 2, 2015. This represents a decrease of ~0.5% from the price of $2.50 per gallon recorded on the previous Monday, October 26, 2015. Prices are 25% lower than they were a year ago.
Why are diesel prices important for investors?
Lower diesel prices are bearish for refiners such as Phillips 66 Company (PSX), Tesoro Corporation (TSO), Valero Energy Corporation (VLO), and Marathon Petroleum Corporation (MPC). As discussed in the previous part of this series, crude oil by-product prices are influenced by crude oil prices, diesel stocks, and refiners’ operable capacity.
Tesoro and Marathon Petroleum combined make up 2.4% of the iShares Dow Jones US Energy Sector ETF (IYE). Valero Energy (VLO) accounts for 2.4% of the Vanguard Energy ETF (VDE), and Tesoro accounts for 3.2% of the Energy Select Sector SPDR ETF (XLE).
Lower diesel prices can result in low production volumes, which is negative for MLPs such as Valero Energy Partners (VLP), Phillips 66 Partners (PSXP), and MPLX (MPLX). Low production volumes can reduce the revenue of transport operators.
Key drivers of diesel prices include seasonal fluctuation in diesel demand, decreased margins for refiners due to low crack spread, and decreased diesel consumption in China. More demand for diesel from European countries might be the only driver that could boost diesel prices in the future.
The EIA forecasts that consumption of distillate fuel, which includes diesel fuel and heating oil, will fall by 0.7% to 30,000 bpd (barrels per day) in 2015 and then increase by 1.3% to 50,000 bpd in 2016. The 2016 growth would be mainly due to an increase in exports and manufacturing output. The average retail diesel price was $3.83 per gallon in 2014. This is projected to fall to an average of $2.72 per gallon in 2015, and then rise to $2.77 per gallon in 2016 due to consumption levels.