Diesel price pain seen easing as US EIA lowers 2023 oil, refined product price outlooks

US retail diesel prices are expected to fall next year from the highs seen in 2022 but continue to be relatively high as US distillate inventories remain at or near multi-year lows through the end of 2023, the US Energy Information Administration said Dec. 6.

In its December Short-Term Energy Outlook, the EIA lowered its forecast for the average 2023 retail diesel price by 17 cents to $4.48/gal, falling 11% from the expected full-year 2022 average of $5.05/gal thanks to high refinery utilization.

"Most of our forecast price decrease from 2022 to 2023 results from lower distillate refinery margins, which moderate beginning in early 2023 based on our expectation that distillate demand will decline in 2023 as production of distillate fuel increases," the report said. "Although we expect the diesel refinery margin to decrease 19% in 2023 from 2022, we still expect it to be more than double 2021 levels," as distillate supplies and inventory builds are limited due to ongoing constraints on global refining capacity.

"Furthermore, the EU's ban on seaborne refined product imports from Russia beginning in February 2023 will keep supplies particularly tight in the Atlantic Basin," adding to supply and price uncertainty facing the distillate market next year, the agency said.

The forecast high US refinery utilization in response to high distillate margins is seen benefiting gasoline inventories as well, allowing those stocks to reach five-year average levels in 2023 and limiting upward pressure on gasoline prices.

The EIA expects retail gasoline prices in 2022 to average $3.99/gal, down 3 cents from last month's estimate, and to continue falling in 2023 to average $3.51/gal, a 10-cent decline from the last estimate.

The agency added that it expected the trend of high blend rates of fuel ethanol seen over the summer to continue through 2023 "as the petroleum component of gasoline remains relatively expensive compared with the price of ethanol."

Crude price outlook

But the EIA lowered its crude oil price outlook for next year by nearly $3/b, reflecting higher than previously expected global oil inventories.

Specifically, the agency forecast that Brent crude would average $92.36/b in 2023, down $2.97/b from last month's estimate for the year, and below the $101.48/b average expected for 2022, which slipped 65 cents/b from the prior estimate. It also reduced its 2023 expectations for WTI crude by $2.97/b to $86.36/b. The agency expects WTI in 2022 at $95.22/b, a 66-cent fall from its November estimate.

Global oil inventories are expected to fall by 200,000 b/d in the first half of 2023 before rising by almost 700,000 b/d in the second half of the year, the EIA said.

Crude price declines from 2022 to 2023 are largely attributed to market concerns about global economic growth and pandemic-related lockdowns in China that reduced oil demand.

"Although we expect some downward oil price pressure could emerge in the second half of 2023 based on our forecast of rising oil inventories, that pressure will likely be balanced by the ongoing possibility of supply disruptions or production growth that is slower than our forecast," the EIA said.

The agency noted that commercial petroleum inventories in OECD countries were at their lowest levels in five years on a days-of-supply basis for most of 2022, and are expected to stay near the bottom of the five-year average throughout 2023.

"Given relatively low global petroleum inventories and the necessary time and magnitude of inventory builds needed to replenish them, the market has limited slack during the forecast period, and any unplanned supply disruption has the potential to increase oil prices quickly and significantly," the EIA said.

Uncertainty over Venezuela

The agency pointed to EU import bans on Russian crude and refined products as a major supply risk as well as uncertainty on Venezuelan oil production. The Treasury Department recently authorized Chevron to resume exporting oil from Venezuela to the US but output will depend on the state of production facilities that have not yet been evaluated.

"Our oil production forecast has a lot of uncertainty for Venezuela, but we expect that production there will increase somewhat next year," said EIA Administrator Joe DeCarolis said in a statement Dec. 6.

The EIA increased its 2022 outlook for US oil production by 40,000 b/d to 11.87 million b/d, and raised its estimate for US oil production in 2023 by 30,000 b/d to 12.34 million b/d.

While the EIA kept its global oil demand estimate for 2022 steady at 99.82 million b/d, it lowered its expectation for 2023 by 160,000 b/d to 100.82 million b/d.