For the eighth time in the past 10 weeks, the Department of Energy/Energy Information Administration benchmark diesel price fell.
The latest average weekly retail diesel price is $4.146 a gallon, down 6.3 cents from the prior week. This week’s price, the benchmark for most fuel surcharges, is the lowest since July 31. It’s been down five consecutive weeks. Since Sept. 18, when the price began its streak of eight declines in 10 weeks, it’s down 44.7 cents.
Crude prices have been declining most of the month. The global crude benchmark, Brent, settled on Nov. 1 at $84.63/barrel. It had settled as low as $77.42 a barrel on Nov. 16 before a slight rebound. But the market has dropped the past three days, and Monday’s 74-cents-per-barrel decline put the price back under $80, to a settlement of $79.98.
The backdrop in the market the past week has been the upcoming meeting in Vienna of the OPEC+ member nations. That meeting was to take place Sunday; its delay until Thursday has been seen by much of the market as a sign that the group, facing declining prices and supply/demand models into 2024 that project out to more weakness, cannot decide which course of action to take.
A headline on a Bloomberg story from Vienna summed up the dilemma the group faces: “Saudi Arabia Seeks OPEC+ Oil Quota Cuts While Some Members Resist.”
“The OPEC+ leader has been making a largely unilateral supply cutback of 1 million barrels a day since July, and is now seeking further support from across the Organization of Petroleum Exporting Countries and its partners,” the Bloomberg article said. The 1 million-barrel-a-day cut refers to the reduction implemented by Saudi Arabia in July on top of the 1.16 million-barrel-a-day reduction that the larger OPEC+ group put in place in May.
One notable trend in recent days is that diesel futures prices have begun to rise again relative to crude. On a straight front-month-to-front-month basis, with Brent prices converted to gallons, the spread of ultra low sulfur diesel on CME settled Monday at 93.36 cents a gallon. While that was slightly below the more than 96-cents-a-gallon price of last Tuesday, that spread was less than 90 cents a gallon fairly consistently between Nov. 7 and early last week. It was more than $1 a gallon in mid-October.
On Monday, the 74-cents-per-barrel decline in Brent was accompanied by a small increase of 22 basis points in ultra low sulfur diesel on the CME commodity exchange, settling at $2.8379 a gallon. The most recent low settlement was $2.7191 per gallon on Nov. 9. That difference in direction moved the diesel/crude spread higher.
A possible cause: Even in the middle of a market that is mostly dealing with growing surpluses of crude, diesel inventories in the U.S. have continued to tighten. In the most recent weekly EIA report, for the week ended Nov. 17, inventories of ultra low sulfur diesel were less than 87% of the seven-year average for that week. (While comparisons have historically been compared to a five-year average, a seven-year average smooths out distortions created by the pandemic.)
One voice on why the market has been sliding, or at least has seen a slide accelerate, came Monday from the weekly report of energy economist Philip Verleger.
His report noted the impact of the options market, where oil users looking to protect themselves against rising prices will purchase call options — giving them the right but not the obligation to purchase oil at a specified price — while sellers purchase puts. A put is the opposite: It gives the owner of the put the right but not the obligation to sell oil at a given price.
Verleger notes that the sellers of crude oil puts and calls need to regularly buy or sell crude oil contracts on the main commodity exchange to stay balanced within their positions, depending on whether prices are rising or falling.
“Hedging has a critical seasonal pattern in which a large percentage of options written during the year expires at year-end,” Verleger wrote. “This means that between October and mid-December, the banks and insurance companies writing options will be selling or buying futures, which adds extreme seasonal pressure to prices.”
Declines in the price of oil the past three years have been accelerated by that liquidation of hedges in a falling market, according to Verleger. “These decreases were not caused by speculation but rather by options writers closing long positions to cover the risk of having to perform on contracts with strike prices of $90 or $100 per barrel,” he said.
Pointing out that Saudi officials have blamed the recent price decline on “speculators,” Verleger notes that “these sales were not ‘speculation’ but customary trading practice. The call writers’ computers followed the geeks’ instructions, buying and selling futures to protect their institutions.”
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