For agriculture, fuel cost is extremely important because it factors into the farming operation’s profit as a direct cost, derived cost, and transportation cost. The price increase directly increases the cost of operating farm machinery. Many farm chemicals use petrochemical feedstocks, which are lighter low sulfur products. Lastly, domestic transportation companies will charge a higher fuel surcharge fee that will increase the cost of all farm inputs. Also, due to farmers being price takers, the farm soybean price will ultimately reflect the increased cost of shipping soybeans from the farm level to the Center Gulf. Of course, ocean freight cost will eventually have to increase to cover the increase in fuel cost.
Retail diesel prices are largely the inverse of distillate stocks as shown in the chart below. The distillate fuel price is being supported by lower distillate stock levels as the petroleum refiners adjust to the new regulations.
The International Maritime Organization’s new regulations (IMO 2020) limit the sulfur content in marine fuels that ocean-going vessels use to 0.5% by weight, a reduction from the previous limit of 3.5% established in 2012. As the implementation date for the 0.5% sulfur cap approaches, the U.S. Energy Information Administration (EIA) expects that shifts in petroleum product pricing should begin right now. EIA anticipates that the effects on petroleum prices will be most acute in 2020. The marine fuel demand shift from high sulfur fuels to lower sulfur fuels is why the EIA expects that diesel fuel refining margins will increase from an average of 43 cents per gallon (gal) in 2018 to 48 cents/gal in 2019 and to 65 cents/gal in 2020.
What the EIA anticipates is increased refining margins will increase diesel yields and increase refinery utilization rate to 95.4% in 2020. It is a logical assumption that as the U.S. continues to increase crude oil production, refinery utilization will increase and eventually drive down the cost of all petroleum products. In 2019, the refinery utilization is 90.6% to date versus 92.8% for the same time period in 2018. A concern is the extra refining required to enable the refiner to make low sulfur content diesel appears to be a more difficult task or more expensive than was assumed. Until the refineries adjust to the new regulations, the lower refinery utilization will put upward pressure on petroleum products and downward pressure on crude oil prices. Many companies are not willing to make major investments to improve the ability of the refinery to remove sulfur more efficiently until the refining margin justifies the investment. The EIA prediction of $3.05 average diesel price in 2020 appears to be optimistic.
