Gasoline meanwhile has seen an increase in U.S. demand, and gas prices are still being supported by a very strong summer driving season. Gasoline is one of the few commodities in the green for the year, with RBOB gasoline futures up 30 percent year-to-date. That compares with a 4 percent decline in West Texas Intermediate crude futures this year.
Gasoline, however, is just now coming off peak driving demand and prices at the pump could fall. The question is how much, and how much will the refining industry continue to supply. For every crude barrel processed, refiners generate both diesel and gasoline.
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"This is going to be the tipping point for refined product. The gasoline refining margins have been at a near record for gasoline so there's a lot of interest in this space," said John Kilduff, partner with Again Capital.
Kilduff said the factors behind the diesel glut could mean it will stay around for while.
"This time around it's very much a supply story...surging amounts or crude oil, and now refined product. It's not slack demand. It's not a barometer that the economy is slowing," said Kilduff. "This should be even more stimulative for the economy."
The improvement in U.S. employment is behind the increase in gasoline demand. "Whenever we see unemployment surge, you see a falloff in gasoline demand because people don't have jobs to drive to— not like now where we're seeing high employment rates and a strong gasoline demand," Kilduff said.
U.S. refineries produced a record 17.1 million barrels of refined product in the week of July 10, according to Kloza. That is in part due to the pickup in demand by U.S. consumers, who have been using about 9.5 million barrels a day of gasoline, about half a million barrels more per day than last summer.
"If you're looking at costs across the country, (diesel) is really as low as it's been since 2009, and it really should be," said Kloza. "It's certainly biased to move lower." Kloza said truck fleets are already paying very low prices for diesel, as they don't pay retail.
Kloza said gasoline prices should see lows in the fall. "I think the precipice for gasoline comes from Sept. 15 to Jan. 15. Diesel has nothing to really lift if from now until October," said Kloza. He said that in October, demand from farmers for the harvest could push up diesel prices, as could the increase in fuel use by shippers around the holiday season.
"But the biggest thing you get is winter, whether it's diesel or heating oil but worldwide that molecule will get some winter burns," he said adding, though, that diesel will be under pressure for the next 60 days.
Diesel supplies have been building, even with the U.S. exporting more than 1 million barrels a day, as other global producers also up their refining capacity. Saudi Arabia, for instance, is running one new refinery and has another on the way.
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"One of the broad things is most of the world's oil demand growth would be distillates-based, to do with big industrial demand growth over longer periods, driven by emerging markets," said Eric Lee, Citigroup energy analyst. "Gearing up for that, the new refinery capacity that's been built has mainly been for distillates. That's where most of the demand growth has been." Lee said China's thirst for diesel was higher before its economy slowed down.
Refineries are being ramped up elsewhere. Kilduff said China's output of distillates increased to 3.8 million barrels a day in June, the highest on record.
"We'll wait and see if that (diesel) market gets sloppy, the way that the crude oil market is sloppy," he said. "I'm sure it will." Kilduff said transportation companies, such as truckers and airlines, should be the beneficiaries.
Fresh U.S. government data is expected Wednesday, but last week's report from the Energy Information Administration showed U.S. crude stockpiles fell by 4.3 million while distillate stocks, which include heating oil and diesel fuel, rose 3.8 million barrels to 141.3 million barrels, the highest level for distillates since January 2012. Refining capacity was running at 95.3 percent, the highest level of the year.
Low oil prices are at the heart of the refining boom, with West Texas Intermediate crude futures Monday falling below $50 per barrel for the first time since April. Pressure on crude and other commodities is expected to continue as the dollar gains ground on the prospect of the Federal Reserve raising interest rates.
The world is heavily oversupplied with crude oil, about 1.5 to 2 million barrels per day. With the agreement on Iranian's nuclear program, now even more oil from Iran should also come on to the market. The deal is just a week old, and already there were reports of Iran's sending oil it has been storing on tankers to Asian markets.
This should be good news for consumers, at the gas pump.
"I think winter gasoline prices on a national average are going to drop down to about $2.35 to $2.40 a gallon this winter. There's still a lot of oil out there. The market expects Iranian oil to come to the market in late 2015, early 2016," said Andrew Lipow, president of Lipow Oil Associates. "At the same time, we're seeing Iraqi and Saudi Arabian oil production at record highs."
According to AAA, that national average for unleaded gasoline is currently $2.75 per gallon, while diesel fuel is about the same, at $2.79 per gallon. Gasoline is down from $2.77 a week ago and $2.79 a month ago, when prices were getting close to peaking. Last year at this time, gasoline was $3.57 per gallon and diesel was $3.86.
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"Despite what you've seen from April until now, the biggest worry among refiners is they're going to be making too much gasoline," said Kloza.
Kloza and other anlaysts said there's so much gasoline being produced, that unleaded gas in some parts of the country could even see a low below $2 per gallon in the fall when the industry is done producing more expensive summer grades of fuel.
California, however, will remain an exception, as refinery problems there have pressured supply. A gallon of unleaded gasoline there was about $3.87 a gallon Tuesday.
U.S. refineries produced 9.4 million barrels of gasoline and 3.5 million barrels of distillates, largely diesel in the week of July 10.
The U.S. also imports refined products, including gasoline to the U.S. east coast. The U.S. exported a total net 1.6 million barrels a day of refined products in the July 10 week.