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Will Diesel Prices Recover in 2016?

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Diesel prices

The EIA’s (U.S. Energy Information Administration) weekly gasoline and diesel fuel price report showed that diesel prices averaged $2.21 per gallon yesterday. This represents a fall of ~1.1% from the previous week’s price of $2.23 per gallon, recorded on December 28, 2015. The current diesel prices are about 29.5% lower than in the corresponding period last year.

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Diesel prices by region

Yesterday’s average diesel price in the West Coast region was $2.46 per gallon. The Rocky Mountain, Midwest, and East Coast regions’ average diesel prices were $2.19 per gallon, $2.13 per gallon, and $2.26 per gallon, respectively. The Gulf Coast’s retail diesel price was $2.11 per gallon.

Diesel prices suffer from oversupply

The slowdown in the European economy has impacted diesel movements from the United States, and the positive refining margins resulted in massive stockpiles. Supplies are continually increasing as the refineries are operating at more than 90% of their operable capacity, which will result in further price falls in the upcoming weeks.

The decrease in heating oil demand is impacting diesel prices, as this oil is used to produce heating oil. When heating oil demand decreases, this oil is abundant and available at lower prices, which results in a drop in prices.

Diesel demand mostly stems from the large trucking and shipping industries. The interest rate hike will lead consumers to spend less, which will result in lower shipping volumes. Lower shipping volumes mean lower demand for diesel.

Due to decreased diesel consumption, the EIA lowered its diesel price estimates from $2.71 per barrel in 2015 to $2.67 per barrel in 2016.

Impact

The lower diesel prices have a negative impact on the revenues of refineries and can increase their operational costs. When operational costs increase, profitability decreases for refineries such as Delek US Holdings (DK), Phillips 66 (PSX), Valero Energy (VLO), Alon USA Energy (ALJ), Western Refining (WNR), and Tesoro (TSO).

Tesoro makes up 3.5% of the Energy Select SPDR Fund (XLE).

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