By Laura Sanicola

(Reuters) – Refiners plan to increase jet fuel production and diesel production this summer, analysts and traders said. This will allow them to favor the historically least profitable barrels over the more profitable.

This is unusual, and it exemplifies how the oil market works. Because of the Russian sanctions, it is now more profitable to refine into jet fuel than make gasoline.

Normaly, U.S. refiners boost gasoline production during the spring and early summer to meet driving season demand. Profitability for distillates like jet or diesel, however, ebbs.

The war in Ukraine has resulted in sanctions against Russia, as well as pandemic-related shutting downs of refineries that have reduced their capacity and unexpectedly high prices. This has impacted Europe’s ability to produce fuel, since it relies heavily on diesel.

According to U.S. Energy Information Administration data, distillate exports increased by more than 1.6 Million barrels per day in the past two weeks. This is the highest level since mid-2019.

Citi analyst in a Wednesday note stated that “The U.S. now acts as the barrel-of-last resort for an Atlantic Basin which scrambles and finds alternatives to shunned Russian crude oils and petroleum products.”

The increase in profits has helped U.S.-based refiners of distillates to make more money. At the moment, distillates are making a profit margin close to $60 per barrel while gasoline makes a profit margin at $34. The average price of gasoline and distillates at this point in the year was $34.48 and $27.48 respectively over the last 10 years. (GRAPHIC: Refining Margins https://graphics.reuters.com/USA-ENERGY/zgvomlbwevd)

Citi stated that the difference between RBOB (and gasoline yields) in America may make it difficult for American refineries to shift to higher gasoline yields.

Refining margins upended in topsy-turvy market: https://fingfx.thomsonreuters.com/gfx/ce/zjvqkmjkjvx/Pasted%20image%201650485248950.png

MISMATCHES AROUND NATION

Export demand is on the rise, but not all areas of the U.S. enjoy the same benefits.

According to EIA data, 94% of nation’s refineries are on the Gulf Coast, accounting for approximately 45%.

Due to the unseasonably cool weather, Midwest farmers have been struggling to get their crops planted. According to U.S. Department of Agriculture, Sunday’s planting had been completed at 4%, which is below the average of 6% over the past five years.

According to one broker, “It is a mismatched market as so many diesel barrels need elsewhere in this world and too much inland. This drives physical prices down.”

PADD 2, the Midwest distillate stocks, is 0.4% less than they were one year ago. However, nationwide distillate inventories reached lows this week that are not recorded since May 2008. The price of ultra-low-sulfur Diesel in Chicago fell 21.5 Cents per Gallon to diesel futures Tuesday. It was last year 5-8 cents lower.

Air travel is now back on its feet after the long and difficult pandemic.

The U.S. East Coast is home to many of the busiest international airports. Jet fuel prices were higher than the futures because stockpiles reached 32 year lows.

Demand will determine whether the market will rebalance. U.S. gasoline and diesel prices have been rising, which has led to a decrease in consumption. However, demand has slipped below the average five-year rate.