OREANDA-NEWS. Strong production rates and weak domestic demand have pushed US ultra-low sulfur diesel (ULSD) cash prices and differentials lower this summer, a trend that is expected to continue for the rest of 2015.

Year-over-year comparison shows weaker values in every region largely because of the steep decline in Nymex futures during the same time frame.

ULSD production rose in 2015 as weak crude oil prices created a strong refining margin environment. Nationally, the 3-2-1 crack spread for US refiners has averaged $22.46/bl in 2015. This pushed production to 4.754mn b/d, its highest level since early January, according to the Energy Information Administration (EIA).

The weak domestic demand for diesel fuel caused total US ULSD inventories to rise by 3.8mn bl to 141.3mn bl, 13.7pc above year-ago levels. This is also 3.4pc higher than the five-year average for the second week of July. The glut of product kept ULSD imports out of the market, causing imports into the US to fall by 38,000 b/d to 103,000 b/d.

The robust production and soft demand is expected to continue. The rise in US distillate inventories was led by the Atlantic coast market where Padd 1 diesel stocks reached a new high for the fourth consecutive week at 38mn bl. Inventory levels are nearly 26pc above last year's levels while refinery run rates hit an all-time high in June at 96.2pc.

A contango market structure through August has encouraged participants in the Atlantic coast to store product in tanks rather than shed length in the prompt market. Tank storage levels have not yet reached sufficiently high levels for traders to begin selling product out of inventory. An open arbitrage from the Gulf coast has been seen for the majority of the season with Atlantic coast premiums currently slightly more than 1?/USG above the shipping tariff of 4.97?/USG.

Midcontinent diesel inventories are stable compared to last year at 30mn bl. A strong contango in the Chicago ULSD market has encouraged storage of product as well, leading to rising premiums for Buckeye Complex deliveries and creating a bifurcated market. The arbitrage from the Gulf coast was shut as the summer began but opened in mid-July to Chicago and Group Three. Differentials are expected to firm again in the fall as the region prepares for harvest season.

Gulf coast ULSD differentials are more than 8?/USG below last year's levels. Strong production levels are assisting in the 13pc build in inventory levels from a year ago at 36.7mn bl.

The west coast is the only region with stronger cash differentials than last year because of unusually heavy summer maintenance around the Los Angeles area. This should change as maintenance activities wrap up this summer.