UPDATE 1-US Midwest diesel prices likely to drop as demand trails off, supplies improve

Shariq Khan
2-min read
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(Adds Phillips 66 response in paragraph 6)

By Shariq Khan

Oct 30 (Reuters) - High retail diesel prices in the U.S. Midwest are drawing more supplies from Gulf Coast and Chicago pipelines that should ease supply worries and cool prices, traders said, as farmers wrap up harvests and winter demand has yet to arrive.

Diesel, used in trucking, farming and manufacturing, hit $4.87 a gallon in Minnesota on Thursday, a nearly 11% increase from last month, according to data from fuel price tracker GasBuddy.com.

Maintenance-related outages at Phillips 66's 208,000 barrel-per-day (bpd) Ponca City refinery in Oklahoma largely has caused the Midwest price surge across Minnesota, Iowa and Kansas, fuel traders and brokers said.

Group 3 diesel spot prices on Oct. 19 traded more than a dollar above the benchmark diesel futures contract on the New York Mercantile Exchange, the highest premium in LSEG records going back to 2011.

"A lack of rainfall gave us a better harvest weather than usual and then the refinery went down in Oklahoma," said Alex Ryan, general manager and energy director at Oasis Energy LLC, a wholesale fuel distributor in Colby, Kansas.

Ponca City resumed normal operations around Oct. 22, market participants told Reuters. A Phillips 66 spokesperson said the company does not comment on refinery operations and details about planned maintenance work are proprietary.

The refinery's return to production has helped ease spot diesel prices in the Group 3 market to a discount of 2 cents against futures on Oct. 26, traders said.

More diesel from areas including Chicago and the Gulf Coast, which were better supplied, also helped soften the premium, a broker said.

However, Midwest diesel inventories remain tight and could pose a problem if any more refining snags hit, said Robert Yawger, energy futures strategist for Mizuho Bank.

Midwest distillate stocks, which include diesel and heating oil, fell for the sixth straight week and stood at 27.7 million barrels as of the week ended Oct. 20, the lowest since June, Energy Information Administration data showed.

Refiners are reluctant to produce more diesel because it will make more low-margin gasoline, undercutting profits. Weak demand for gasoline has caused its profit margins to touch their lowest this month since December 2020 at $6.97 per barrel. (Reporting by Shariq Khan; editing by Jonathan Oatis and Chizu Nomiyama)