Zoomlion, a Chinese company that manufactures construction and farm machinery, had a lot of people talking when it displayed its entire tractor and combine lineup powered by diesel-electric hybrid drives.

Category-busting one-power-unit company Nexat also drives its machine using electric motors.

WHY IT MATTERS: Farms are pressured to reduce their greenhouse gas emissions and are look to save money through fuel efficiency, which has resulted in more engine options than ever before.

Diesel-electric drives are used in locomotives and in construction equipment and have been slow to find their way into agriculture. They are based on the theory that systems can be made simpler and more energy efficient if the power is applied by electric motors at the points in the equipment where the power is needed.

A diesel engine is usually fitted with a generator off the back of the engine and the generator distributes power where it’s needed.

The major producers of engines for agriculture have shown some concepts powered by diesel-electric systems, but there are few on the market.

John Deere has a generator option for its 8R tractors, the eAutoPowr electronic variable transmission, which provides power for implements from a generator powered by the diesel engine, but it isn’t a full diesel-electric system.

Why are there more agricultural engine options?

However, the major machinery providers are building flexibility into their new engines, making them ready with some modifications to burn various types of fuels, ranging from ethanol to biodiesel and hydrogenated vegetable oil (HVO), popular in Europe as a completely renewable fuel.

That means farmers should be ready for engines that can burn most of the fuels they can lay their hands on, with some modification.

Agco Power unveiled the largest of its new Core engine lineup at Agritechnica, the 80, which is an eight-litre engine. It will end up in the Fendt 800 lineup, said Jarno Ratia, director, sales and marketing and project management for Agco Power.

The engines are highly efficient, he said.

“It revs at 1,700 (revolutions per minute), which is matched with the tractor power train perfectly,” he said.

The tuning of the continuously variable transmission with the engine means the engine can hit top speed at 1,400 r.p.m.

The Core engines are set up to use other sources of fuel, such as biodiesel, hydrogen and methane, depending on which fuel the farmer can source.

The bottom line is that none of them are better than the power that can be produced from a litre of diesel.

Hydrogen, for example, results in a drop of about 30 per cent in the power output of an engine.

There are supply chain and structural limits to hydrogen at this point, including being able to store it on farms and on tractors in enough volume to prevent frequent refilling.

JCB is betting heavily on hydrogen and has a working model that it sells to companies looking to reduce their emissions.

To help offset the power loss of hydrogen, Agco has added a hybrid system to its hydrogen energy.

However, Ratia says hybrids are a step, not a permanent solution. There were numerous tractors and combines with concept hybrid-battery boosters at Agritechnica 2023. There were few in 2025.

“Earlier, the whole industry thought that hybrid would be the first step to go full electric, but now we think a little bit different. So we know that adding hybrid is adding complexity and cost, but end of the day, not really giving too much benefit for the vehicle.”

The idea that farmers could produce their own fuel is also being discussed.

Jahmy Hindman, senior vice-president and chief technology officer at John Deere, pitched the idea that farmers could produce their own fuel on the farm, taking up a limited amount of a previous-year’s crop to produce the next and completing an energy cycle on the farm.

John Deere’s Justin Rose, president of the company’s Worldwide Agriculture and Turf division said at a media event at Agritechnica that the company will continue to produce options that farmers look for around powertrains.

New Holland showcased its T7 methane-powered tractor at Agritechnica, including the fact that it has made commercial sales. It would epitomize the ideal of energy circularity on the farm, using methane produced by manure to power the tractor.

Battery technology

There continues to be evolution in battery technology, too, and at Agritechnica John Deere showcased its 130 h.p. equivalent tractor and numerous autonomous systems that run on electricity, while Agco presented a new stackable battery concept.

Both are scalable so that the amount of working time needed for the tractor can be matched by its battery cost.

With current technology, 120 to 130 h.p. will be about as large as battery-only tractors will get before weight and charging capacity become limited.

Autonomous vehicles also are being powered by a soup mix of power types that range from a battery at the smaller end to diesel engines used in tractors for the largest. In between, there are options such as the New Holland R4, an autonomous concept vehicle that runs on diesel-electric hybrid power.

The Nexat is powered by two 550 h.p. engines, but the wheels are driven by electric drives, which helps make the unique concept work.

Diesel electric helps Nexat distribute power more flexibly throughout its system.

At Agritechnica, the Zoomlion combines and tractors were attracting lots of visitors and opinions.

The company’s combine has a diesel engine that powers a generator, which distributes power to 12 motors to drive the wheels, the feeder housing and header, grain augers, dual rotor threshing system and the straw chopper. The combine is rated at 480 h.p. The system also includes a battery to help manage the power flow.

That means fewer belts, says Kevin Song, technical manager for the combine. It means a simpler unit with fewer moving parts.

The company says using electric drives will reduce the linkages — chains and sprockets and belts and pulleys — by 70 per cent compared to a conventional combine. That means fewer breakage points, although sorting out an electrical problem can also be challenging.

The motors can all reverse, which means easier cleaning out of plugged headers and feeder housing, said Song.

Zoomlion’s tractors are rated at 160 to more than 700 h.p. in a tractor that was just announced but wasn’t at Agritechnica. Company spokespeople at the show said diesel-electric drives can improve fuel efficiency by 15 per cent.

The company also demonstrated an autonomous tractor in a live video demonstration from a site in China.

Zoomlion’s tractors and combine aren’t yet available in North America but are working in Australia and South America.

Fuel efficiency and reducing particulate and greenhouse gas emissions continue to drive evolution in powertrains and are resulting in more options for farmers but also more complexity in the engines and fuel-supply systems.

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Canola “has found a level where it’s stabilized, but there’s not a lot of life right now,” said Ken Ball of PI Financial in Winnipeg, adding that “all canola needs is a little spark, and it’s just not getting it right now.”

With seasonal harvest pressure slowing down and crush margins historically wide, Ball expected canola futures could be due for a move higher.

However, he added, speculators were still leaning on the short side of the market and showing a reluctance to buy.

“It will need some help from (soy)bean oil,” said Ball on what could trigger a sustained rally in canola.

However, while he expected that market should be stabilizing, recent losses in crude oil and diesel were bearish.

From a chart standpoint, the November canola contract has found support at around $710 per tonne, with $725 acting as nearby resistance.

— Phil Franz-Warkentin is an associate editor/analyst with MarketsFarm in Winnipeg.

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In August, the NFU released the third edition of its Agriculture Greenhouse Gas Emissions in Canada report. It reflected updated information from the latest national inventory that the federal government released this year.

The 2023 inventory report contained several methodology changes, the NFU said. In particular, it drew attention to new values for “crop residue C input.” Those new values stemmed from recalculations due to new data from the 2021 Census of Agriculture.

All told, “trendline average soil carbon sequestration in 2020 and 2021, from all sources and causes, is up about 10 percent,” the NFU said.

Soil carbon sequestration is estimated at 22 million tonnes per year of carbon dioxide equivalent, up from 20 million tonnes suggested in the 2022 inventory report.

Environment and Climate Change Canada also changed the way it models on-farm fuel use and associated emissions.

The exact nature of that change isn’t clear, said Darrin Qualman, author of the report and the NFU’s director of climate crisis policy and action. Attempts to clarify with ECCC weren’t fruitful, he added.

As best he could tell, prior to the 2023 national inventory report, the ECCC said tillage reduction was leading to generally consistent fuel use year to year. A graph in the NFU report shows emissions from on-farm diesel fuel use fluctuating between eight and ten million tonnes per year from the early 2000s to present.

RELATED: NFU calls for agriculture to ‘scale back’ nitrogen use, export goals

Based on lengthy quotes from the inventory report in the NFU report, ECCC appears to have decided this assumption was incorrect, and rebalanced the way it splits use of fuel between on-road and off-road vehicles, including use of farm equipment in the field.

As a result, emissions from on-farm diesel use climbed steadily from 1990 until the late 2010s instead of being relatively flat, according to the EEEC. Emissions begin to drop again between 2018 and 2021, but still remain slightly above the projected emissions from the previous national inventory.

Qualman said the macro trends remain the same, regardless of the minutiae.

“We’re not uncertain about the trend line,” he said. “As we’ve dramatically increased fertilizer tonnage, we’re not uncertain as to whether the emissions have gone up or down. We’re certain that the emissions have gone up.”

There is uncertainty, but Qualman said that uncertainty is not the same as saying they don’t know if emissions are significant.

“We just have a little question about where they are in absolute terms,” he said.

A version of this article first appeared in the Manitoba Co-operator.

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And while that move was bullish for the markets, by how much remains to be seen, said Phil Flynn of the Price Futures Group in Chicago.

“It’s probably put a floor under the price of oil,” Flynn commented. “The question is how high will it go?”

Reports said that in addition to the Saudi cut, the rest of the 23-member alliance would reduce its output by a net 400,000 BPD.

To justify the cut, Saudi Arabia said there’s a looming supply glut in the global oil market that’s already contending with weaker prices.

Flynn said crude oil modestly increased but there were still issues, noting there continued to be tensions within OPEC and OPEC+.

As the week of June 5 started, prices for Brent Crude and West Texas Intermediate gained more than $1 per barrel. However, by mid-afternoon that Monday those gains faded to well below 50 cents per barrel (all figures US$).

Prices are “struggling because the Saudis made some comments…that they’re fed up with OPEC members who aren’t meeting their oil output goals,” Flynn explained, pointing to some of the cartel’s African members.

Also, Flynn said another report on Monday indicated Russian oil loadings at the country’s western ports hit a four-year high in May, as they produced as much as they could and sold it at a discount.

“The Saudis are calling for more transparency from the Russians as to how much oil they are producing,” he added, pointing to Russia previously promising its OPEC+ partners it would reduce its output.

As for Saudi Arabia, Flynn stated the kingdom believes it can push up oil prices and not hurt its share of the global market.

However, he said the current market has been nervous and pessimistic as to what could come down the road. Otherwise the oil market normally looks ahead to see what could transpire.

“They’re erring on the side that demand is going to fall off the map even though that hasn’t happened yet,” Flynn said, noting that supplies remain tight.

North American prices will climb upward again, he added, suggesting gasoline in the United States could reach $5 per gallon.

“But I think the market is going to need a little convincing in the days ahead as to whether the economy can stand this production cut and see if inventories really tighten,” Flynn said.

One wildcard he cited was Russia, as it likely wants to avoid a price war with Saudi Arabia.

“If they don’t keep the Saudis in their back pocket this turns into a price war, and neither one of these countries are going to win,” Flynn emphasized. “But the jury is still out as to whether the Russia can comply.”

It’s estimated OPEC+ is responsible for 40 per cent of the world’s crude oil. The alliance is comprised of the 13 members of the Organization of the Petroleum Exporting Countries and 10 additional members including Russia, Mexico and Kazakhstan.

— Glen Hallick reports for MarketsFarm from Winnipeg.

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Canada is shortly going to feel the effects of last year’s ground-breaking interest rate hikes, complete with slowdowns in the economy, the GDP and consumer demand, said Vijay Muralidharan.

With that will come a diminished appetite for diesel.

“These high (diesel prices) will be hit by a slowing economy that’s to come in the summer or the fall months,” said Muralidharan, adding there’s already been a slight rebound in global inventory levels that have been at historic lows in recent months.

“I’ve noticed over the last few weeks that the inventory level has improved. It’s much better than when we went into the winter season. This can give some sort of comfort.”

While lower prices are welcome, Scott Keller doesn’t think the change is worth tanking the economy.

“A break in diesel prices would be fantastic. At the expense of a downturn in the economy? I don’t know if that’s really what we want,” said the Camrose area farmer.

“If people are buying less to save money because they’re worried about getting bills paid, that causes a recession. I don’t know if the net benefit is better for farmers.

“Even if our diesel price drops, say, five bucks an acre but I lose money on commodities, I’m probably losing when that happens.”

The cumulative effect of diesel plant shutdowns or plant conversions to gasoline, plus the influence of U.S. prices, created a perfect storm for diesel and drove prices at the pump into the $2 per litre range.

But the single biggest factor has been Russia’s war in Ukraine, said Muralidharan.

“Because of the war in Ukraine, crude prices went to astronomical levels. The price of products jumped simply because crude prices jumped. On any given day, crude drives 55 to 69 per cent of diesel and gasoline pricing.”

A domino effect occurred during the summer.

“Natural gas prices went to pretty high levels,” said Muralidharan. “If gas prices go up, the alternative is diesel or heating oil.

“Because Europe and South America couldn’t afford natural gas, they drew down on high diesel supply from the U.S. Gulf Coast, which has the highest inventory of diesel.”

That set the stage for pricing pain.

“Since summer, the diesel inventory level is the lowest we’ve seen since 2000 (and) the second-lowest point historically speaking, which is quite alarming going into winter if we have a cold season. What if a refinery goes out of commission? That would mean a draw-down on inventory, but if you have low inventories, what do you do?”

Although the situation is improving, farmers, truckers and other major users of diesel aren’t out of the woods yet, said Muralidharan, noting maintenance shut-downs of refineries will begin in spring and Vladimir Putin could cause even more economic chaos.

His advice to farmers is to watch for signs of a slowing economy.

“If you start looking at the economic data, you see consumption is falling. People aren’t spending as much money,” he said. “Even demand for and purchases of housing have come down significantly from a year ago or even two years ago. That’s the first signal that the economy is slowing.”

Producers may be shielded from the worst effects of a poor economy simply because “people need to consume food.”

Keller is skeptical of that claim, noting farmers are just as vulnerable in a soft economy as anybody else.

“Food’s expensive,” he said. “If you’re having trouble paying your bills, why wouldn’t you try to save 10 or 20 per cent on your food bill? I would think people are going to do that.

“They say the food banks have never had more people needing their services, so at a certain point people will eat cheaper food if they’re forced to. We can’t just take it for granted.”

Keller is taking steps to stretch his diesel fuel budget.

He keeps track of prices through his retailer, has hired a custom grain hauler and is looking at increasing his storage capacity. Minimum tillage also helps reduce fuel costs.

“Definitely the biggest fear is a shortage, because then we’re not doing anything,” he said. “I’ve put more thought into increasing my storage for diesel just because I can only store about 20 to 25 per cent of my annual needs.

“I thought maybe it would be better to double that because then if there was a shortage I might not be affected by it.”

Otherwise, Keller said he doesn’t give much thought to his diesel costs. Even at current prices, he doesn’t consider it a particularly onerous line item.

“At the end of the day, diesel isn’t a massive input cost,” he said. “It’s a necessity. We have to have it, but it doesn’t get a whole lot of thought from a management standpoint. There’s other places to focus time and energy on.”

Three Hills producer and agronomist Steve Larocque expressed similar sentiments.

“We have measured fuel use at seeding and harvest and worked it out per acre,” said the owner of Beyond Agronomy.

“For me, I probably use four to five litres per acre of fuel on seeding. I would use maybe a litre (per acre) on spraying and then five to six litres per acre for harvest. Other farmers could be a lot more efficient than I am.”

At about 15 litres per acre, that’s $20 to $30 per acre.

“Diesel’s a big line item but not the biggest,” said Larocque. “Fertilizer’s the big one because you’re talking $150 to $250 an acre in expense relative to $20 to $30 per acre.

“But (diesel is) going to chew up some margin for sure. It’s not to be ignored.”

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“For canola crush, in terms of possible capacity growth in the years to come, we could see almost six million tonnes of increased capacity based on facilities that are either under construction today or have been announced,” Chris Vervaet, the association’s executive director, told attendees at Canola Week here.

“That’s significant growth from the current capacity – a 50 per cent increase, in fact.”

While Canadian production of renewable diesel is low now, it should reach one billion litres by 2024, two billion the year after, and almost 4.5 billion by 2027, Vervaet said during an online presentation.

There are a number of projects poised to come on stream, he said.

Parkland Corporation is expanding its renewable diesel production at its refinery in Burnaby, B.C.; Imperial Oil is proceeding with a renewable diesel complex at its refinery near Edmonton that will produce more than one billion litres annually; Federated Co-operatives Ltd. says its similar-sized facility at Regina will be in operation by 2027; Tidewater Renewables is building a facility in Prince George, B.C. able to produce 150,000 litres annually; and a Saskatchewan company called Covenant Energy announced last year that it plans to build a 300-million-litre facility in that province.

Production capacity is growing even faster south of the border, and so is demand for renewable diesel. Unlike biodiesel, it is chemically identical to fossil diesel and can be used in its place, even in cold weather.

Depending on the feedstock and production method, renewable diesel can reduce greenhouse gas emissions by 80 per cent or more, and that’s leading governments to push the green fuel, said Vervaet.

“There are a lot of biofuel policies that are driving demand over the next decade or so,” he said, adding that has already led to a production boom in the United States.

“Two years ago, there was 2.5 billion litres of production capacity. This year, that’s already roughly tripled. We see it now at 7.6 billion litres.”

Feedstocks can be vegetable oils (including soyoil and used cooking oils) and animal fats, but Vervaet predicted there will be a major expansion of canola production in North America, possibly by 50 per cent or more. Some of that could come from expanding into the brown soil zones of Canada and growing winter varieties in the U.S., he said.

“We have a lot of opportunities for productivity gains and acreage expansion. We have a high degree of optimism that we will see canola production grow in North America. Renewable fuels and the demand for renewable fuels is going to grow as well.

“We think there’s a lot of room to grow production and it will keep pace for the canola used in biofuels and the rest of canola will be used in the traditional markets such as food and feed.”

Producers haven’t seen the impact yet but they will, said Charles Fossay, president of the Manitoba Canola Growers Association.

“It’s probably three years away before we will see the full effect of renewable diesel and biodiesel as these fuel standards kick in,” said the grain farmer from Starbuck, southwest of Winnipeg. “As these new crush plants come online and they start using canola oil to be part of the refining process to produce diesel fuel, it’s another market for producers.

“In the long run, it will maintain good canola prices and add a bit more to the prices that farmers receive from the crops they grow.”

Alberta producer John Mayko echoed those comments.

“Definitely, I think it’s a good news story,” said the grain farmer from near Mundare. “I’m not sure how much extra demand will be from the biodiesel side of it. I guess it will depend on what the market forces us to do, whether the processors decide to put the canola oil into renewable diesel or biodiesel. Either of them is good news for us.”

Renewable diesel will also create more stable demand for canola, since producers will be able to sell to the North American market rather than relying on overseas buyers such as China, said Mayko.

Renewable diesel will also enhance the green credentials of farmers, said Fossay.

“I think it’s also showing how agriculture is helping to deal with climate change by reducing nitrous oxide and carbon dioxide emissions,” he said. “It’s just one of the many ways that agriculture is helping deal with those issues.”

And the push to lower greenhouse gas emissions isn’t going to let up, Vervaet said during his presentation.

“Renewable fuels are a proven and viable solution to decarbonize transportation fuels.”

“Transportation fuels in Canada, the United States and globally account for a quarter of all greenhouse gas emissions. It’s a very significant footprint in terms of emissions from transport fuels.

“Renewable fuels are part of that solution, especially renewable fuels from crops like canola, because they have a lower carbon footprint.”

A key hurdle was passed this summer when the federal government released details on its Clean Fuel Regulations. The canola sector had been concerned about the methodology that Ottawa would use to calculate how green a fuel source is, as well as the possibility that canola would require audits or certification. But those fears were largely allayed because the regulations acknowledge farmers’ stewardship efforts such as no-till and minimal till, which contribute to canola’s lower carbon footprint.

When the new clean fuel standard starts coming into effect next summer, the push for greener fuels will intensify, Vervaet said.

“This is a regulation that will mandate lower carbon intensity for the fossil fuels sold and used in Canada,” he said. “The federal Clean Fuel Regulations mandate a 15 per cent lower carbon intensity by 2030.”

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The agricultural commodities trader has not altered its own capacity plans due to a U.S. government proposal on biofuels announced last week, Heckman said on a webcast. “Demand is up,” he said.

Under the plan, announced by the U.S Environmental Protection Agency, oil refiners will be required to add 20.82 billion gallons of biofuels to their fuel in 2023, 21.87 billion gallons in 2024 and 22.68 billion gallons in 2025.

Some analysts said the proposal’s increase in the amount of biofuels that refiners must use was not as great as they expected — a view that has pressured shares of Bunge and rival ADM.

The proposal “calls for a surprisingly low amount of growth” in the requirement for biofuels use, JP Morgan analysts said in a note on Tuesday. The sector could have an oversupply of renewable diesel and delays or cancellations by companies of capacity expansion without large enough mandates, the firm said.

“It’s sure not affecting us,” Heckman said of the EPA proposal. “We’ve been making our analysis for the long term.”

Bunge and Chevron formed a joint venture last year and announced plans to expand capacity by 2024 at Bunge facilities in Illinois and Louisiana that crush soybeans, which can be used to produce soy-based diesel.

Separately, Heckman said it makes “complete sense” for China to add Brazil as a supplier of corn, a move that threatens U.S. grain exports to China. Chinese customs updated its list of approved Brazilian corn exporters last month, including facilities owned by Bunge, ADM and others.

In Ukraine, the war has likely been a “net positive” for Bunge because the company has needed to manage more risk for customers, Heckman said. An agreement to maintain an export corridor for Ukrainian grain has helped bring down food-price inflation, though capacity has not returned to pre-war levels, he said.

— Tom Polansek reports on agriculture and ag commodities for Reuters from Chicago.

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Suncor replaced its CEO in July and agreed to review its retail fuel unit by the end of this year after Elliott Investment, which owns three per cent of the company, pushed for changes, flagging a poor safety record and lacklustre stock performance.

But Canada’s second-largest oil producer decided against selling its fuel stations business after a review that included gauging interest from third parties.

Earlier this year analysts estimated the unit could be worth $5 billion to $11 billion. Suncor owns 1,600 Petro-Canada stations accounting for 18 per cent of Canada’s retail fuel sales, making the business one of the biggest in the country.

Petro-Canada’s operations also include bulk fuel delivery for farm and industrial customers across the country, as well as lubricant supply for farm, construction and transport equipment.

“The board unanimously decided it’s in shareholders’ best long-term interests to retain retail and continue to optimize the network to enhance cash flow and value generation,” interim CEO Kris Smith said during an investor day presentation.

Calgary-based Suncor also released its 2023 capital budget on Tuesday, forecasting higher capital spending while production remains nearly flat.

The company said it would focus on improving the retail fuel business through expanding partnerships with non-fuel businesses such as quick service restaurants and convenience stores.

“We do not see the retail segment as being an issue operationally and believe the asset provides outsized strategic value within the existing organizational structure,” National Bank analyst Travis Wood said in a note to clients.

Elliott did not immediately respond to a request for comment.

Suncor has made a number of other major changes since the activist firm took aim at the company, including replacing its CEO and some board members, selling renewable energy assets and taking steps to improve safety and operations at oil sands sites.

Smith told investors the new CEO search was expected to conclude in the first quarter of 2023.

Industry analysts were broadly positive about Suncor’s decision to hold on to its retail fuel business, but warned higher operating costs in 2023 could weigh on shares.

Suncor said oil sands costs would rise as it starts a three-year plan to improve performance at the troubled Fort Hills oil sands mine in northern Alberta, while inflation was also impacting the ability to reduce costs.

— Reporting for Reuters by Nia Williams; additional reporting by Ankit Kumar and Mrinalika Roy.

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U.S. inventories of distillate fuel oil fell to 106 million barrels in early October, the lowest seasonal level since the government began collecting weekly data in 1982. EU distillate inventories were just 360 million barrels at the end of September, the lowest seasonal level since 2004. Singapore mid-distillate inventories have fallen to just eight million barrels, the lowest seasonal level since 2007.

[RELATED] Surge in U.S. renewable diesel supply won’t offset loss of petroleum diesel

The global petroleum and refining system has proved unable to keep up with rapid growth in fuel consumption as a result of the manufacturing and freight-led recovery after the coronavirus pandemic.

The immediate bottleneck is the lack of enough distillation and catalytic cracking capacity to make middle distillates from crude.

The world’s two largest refinery systems are both producing less distillate fuel than before the pandemic erupted. U.S. refinery closures brought on by the pandemic, equipment failures and the planned shift to electric vehicles have left insufficient capacity to meet both domestic and rising export demand. U.S. refineries produced an average of 4.9 million barrels per day of distillate fuel oil in 12 months ending July 2022, down from 5.2 million in the same period three years earlier.

[RELATED] It’s good to be green — canola cleared under new ‘clean fuel’ regulations

China’s refineries have also scaled back crude processing as the country struggles with the economic disruption caused by repeated city-level lockdowns to control the epidemic.

China produced 115 million tonnes of diesel in the first eight months of 2022, down from 119 million in the same period of 2018, according to the National Bureau of Statistics.

Some western policymakers have called on China to relieve the distillate shortage by boosting crude processing and resuming fuel exports. The country recently issued new export quotas to allow more fuel to be sent abroad.

But diesel accounts for only 30 per cent of the output of China’s refineries. The rest is gasoline (26 per cent) along with lesser amounts of naphtha, fuel oil, petroleum gases, asphalt, coke and kerosene.

Processing significantly more crude to meet the export demand for distillate would likely leave the refinery system with excess inventories of other products.

In any event, accelerating refinery processing will simply push the shortage upstream from the fuel market to the crude market.

Brent’s six-month calendar spread has been trading in a backwardation of more than US$8 per barrel, in the 98th percentile for all trading days since 1990, a sign of how tight the crude market is already.

U.S. crude stocks including the government’s strategic reserve have fallen to the lowest level since 2002, according to data from the U.S. Energy Information Administration.

There is not enough crude available to satisfy a big increase in demand from the refiners in China without depleting inventories further and sending prices higher.

This is the context in which U.S. officials told their Saudi counterparts there was “no market basis to cut production targets” before October’s OPEC+ meeting, according to the U.S. National Security Council.

In the absence of major new additions of crude production and refinery capacity, the only path to market rebalancing is through a sharp deceleration in fuel consumption to stabilize and then rebuild distillate inventories.

Distillates are overwhelmingly used in manufacturing, freight transport, farming, mining, forestry and oil and gas extraction, so consumption is driven primarily by the economic cycle rather than prices.

The need for a major reduction in consumption from trend implies a relatively severe downturn in the business cycle across North America, Europe and Asia.

The U.S. Federal Reserve cannot drill oil wells or build new refineries, but it can reduce fuel consumption by raising interest rates and inducing a broader slowdown in the domestic economy and major trading partners.

U.S. interest rate traders anticipate the Fed will raise its target for the interbank federal funds rate to 4.75 to 5 per cent before the end of March, up from 3 to 3.25 per cent now.

If realized, the forecast increases would take U.S. interest rates to the highest since October 2007, immediately prior to the onset of a recession that December.

The U.S. Treasury yield curve between two- and 10-year securities is more inverted than at any time since March 2000 and before that February 1982, both of which were associated with the onset of recessions.

The World Bank, International Monetary Fund, World Trade Organization and United Nations Conference on Trade and Development have all recently warned that a severe slowdown is likely in 2023.

But with spare capacity almost exhausted, a recession is the most likely route to rebalancing the distillate market in particular and the petroleum market in general.

– John Kemp is a Reuters market analyst. The views expressed are his own.

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U.S. refining capacity has declined in the last two years, as plants shut during the outset of the coronavirus pandemic, causing prices to spike. Several plants are being converted to facilities that can produce cleaner-burning renewable diesel, but at least for now, those facilities will not fully replace those refined barrels.

There are at least 12 renewable diesel projects worth more than $9 billion under construction, with another nine proposed (all figures US$). The 12, along with existing plants, are expected to produce about 135,000 barrels per day (bpd) of renewable diesel by 2025 according to EIA data, from around 80,000 bpd now.

However, since 2019, diesel production capacity has dropped by about 180,000 bpd total, according to the U.S. Energy Information Administration, and at least one more U.S. refinery is set to close next year, further reducing output. In addition, those refiners set to produce renewable diesel will also no longer produce gasoline or jet fuel.

Globally, about 400,000 bpd of combined diesel, jet fuel and fuel oil capacity has been lost since 2019, according to calculations from EIA data.

Renewable diesel is made from animal fats, food wastes and plant oils but is chemically equivalent to petroleum-based diesel. It can be produced in existing refinery equipment, but the yield are lower than with diesel. Biodiesel, another plant based diesel, must be mixed with petroleum to operate effectively in engines.

Growing demand and refinery losses have pushed diesel prices to record levels. The retail price of U.S. diesel has surged 80 per cent this year to $5.78 a U.S. gallon, and low inventories have raised the potential for shortages. U.S. stocks of distillates, including diesel, are down 19 per cent from a year ago.

About 1 million bpd of new petroleum refining capacity is planned in the next five years in Asia, the Middle East and on the U.S. Gulf Coast. But experts say startups are difficult to predict due to construction delays, changes in market demand and financing.

Biodiesel pivot

U.S. refiners joined the renewable fuels bandwagon two years ago as the pandemic slashed fuel demand and environmental pressures led several to choose de-carbonizing over shuttering facilities.

Marathon Petroleum’s 166,000 bpd Martinez, California refinery and Phillips 66’s 120,200 bpd Rodeo refinery, also in California, converted to renewable diesel facilities. Combined, they will produce 100,000 bpd of renewable diesel by 2023.

HF Sinclair converted a 52,000-bpd Cheyenne, Wyoming, refinery to produce 6,000 bpd of renewable diesel. The former Come-by-Chance refinery in Newfoundland aims to begin producing 18,000 bpd of renewable fuels by 2024.

“These projects should bring incremental barrels in the next few years, but not now when they would be more needed,” said Ravi Ramdas, managing director of energy consultancy Peninsula Energy.

Renewable fuel profits have been bolstered by states, led by California’s Low Carbon Fuel Standard, that reward producers with tradable credits for producing renewable fuels.

However, the credits are now trading at about $80 per ton, down from $200 per ton in 2020, when the majority of these projects were proposed. Still, U.S. refiners say they are not backtracking on renewable diesel projects.

The cost of vegetable oils used to make renewable diesel also has shot up following Russia’s invasion of Ukraine. Soybean oil, a popular refinery feedstock, is up 40 per cent year-over-year, while crude oil is up more than than 60 per cent in that time.

— Laura Sanicola reports on the U.S. energy sector for Reuters from Washington, D.C.

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