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Last week we talked about one of our favorite oil stocks to play the diesel shortage. The shortage hasn't let up at all in the face of cold weather hitting the Northeast.
Across the Pond, European refineries have purchased too much oil ahead of the December 5, 2022 price cap on Russian oil. It’s quite unclear how that price cap will work – and equally unclear which nations might participate in the economic scheme for it to reach its desired outcome.
The price cap's goal, in theory, is to stop Russia from profiting from the high oil prices prevailing in global markets since its invasion of Ukraine in February 2022. The theory is that countries engaging in this price cap will deny oil transport services that include insurance, finance, brokering, and navigation to vessels with crude priced over the fixed level.
There are winners and losers in this situation. The obvious winner is OPEC – the global oil cartel that sets prices for the bulk of international production. Right now, crude prices are dropping fast as European refiners are suddenly awash in crude.
But things can change quickly after December 5. Even though demand is expected to fall in the year ahead, World Oil projects that there will be “intensifying competition for spot cargoes from the United States, North Sea, and even the Persian Gulf.”
Meanwhile, Europe continues to face strikes at its major refineries at a time when they're awash in oil.
France has faced strikes at seven locations for the last 50 days. Italian workers are demanding a new deal at a Russian-owned refinery. Workers are striking for two weeks at the Fawley refinery in Southampton, England, demanding higher pay. And BP workers in Rotterdam, the Netherlands, started a “rule-to-work” action last week.
This is a recipe for volatility, and we could see a significant price whipsawing in the months ahead as refineries scramble to reach deals, while the global markets could face a product squeeze.
It's not any better here at home...
The Diesel Crisis Is Still Unfolding in the United States
The nation's diesel supply remains under 25 days right now. This past weekend, a historic blizzard dumped upwards of 6 feet of snow on parts of the eastern Great Lakes and western New York state, and much of the East Coast is enduring snow and January-like temperatures before Thanksgiving. Amid this, American citizens are forced to cut back on heating oil. They’re turning off their thermostats – wrapping themselves in blankets – and shivering in front of Netflix.
Diesel inventories are extremely tight on the East Coast, and prices are surging in the Northeast. The worst supply problems, however, are in the Southeast. Patrick De Haan, who heads petroleum analysis at GasBuddy, said that supply would remain tight. "I'm hoping it might improve, but if it's a cold winter, heating oil, which is very similar to diesel, could see higher consumption. We may make it through winter—but barely."
As the CPI report noted in October, heating oil increased by 19.8% year-over-year.
The Biden administration has said it will work with people from both sides of the aisle. Maybe they should listen to several Congressional leaders begging the administration to suspend the Jones Act so that we can physically move diesel and heating oil to the Northeast before someone freezes to death. This isn’t complicated – it takes a simple pen stroke using the authority provided by American voters.
Some analysts are suggesting that smaller trucking companies will fold. The Pennsylvania Motor Truck Association warned that while diesel production is happening, the costs associated with higher trucking costs remain very volatile. "Average consumers should absolutely be concerned because all of the items that you pick up at the store, all of the consumer products that you buy, were on a truck at some point," the spokesperson said.
But, as with all crises like this, folks that move quickly and with foresight can protect themselves and beef up their nest-egg...
Here Are the Diesel Shortage Stocks to Buy Now
I don’t anticipate that this price pressure on crude will last long – especially with the December deadline approaching in Russia. I continue to argue that investors take advantage of the recent downturn and start to build positions (using puts or put spreads) on companies like Occidental Petroleum Corp. (NYSE: OXY), Devon Energy Corp. (NYSE: DVN), and Energy Transfer LP (NYSE: ET).
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.