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Benchmark diesel price near lows last seen in July

Retail diesel prices are now near levels not seen since the beginning of last summer.

The weekly average retail diesel price posted by the Department of Energy/Energy Information Administration fell 5.9 cents a gallon Monday to $3.789. It’s the lowest price in the data series since $3.767 a gallon was posted July 3, 2023. It’s also the sixth consecutive weekly decline in the price, which is now down 84.4 cents a gallon since its most recent high of $4.633 a gallon posted Sept. 18.

Futures prices of ultra low sulfur diesel on the CME commodity exchange are down about 17 cents a gallon since April 15, settling Monday at $2.4871. But the retail price as reflected in the DOE/EIA number is down about 23 cents a gallon. 

Some of that difference is the normal lag of retail prices from before April 15. But a factor also is the continued weakness in physical prices, which in some markets are falling faster than declines in the CME benchmark. Those declines show up more rapidly in wholesale prices before making it down to the pump.

The physical diesel market in the U.S reflects a cents-per-barrel price for diesel either on a barge or pipeline, and prices are showing either flat numbers or weakness, helping to push retail prices down more than declines in the futures price.

Physical diesel prices in key markets such as the U.S. Gulf Coast or New York Harbor have not moved much. But on the Buckeye Pipeline system, which serves parts of the Midwest and mid-Atlantic market, the spread between physical barrels and CME ULSD was negative 22 cents a gallon on Monday after being negative 6 cents on May 7, according to data from DTN.

In Chicago, a negative 24-cents-per-gallon spread was 4 cents stronger Monday than Thursday, but the spread was negative 6.5 cents a gallon May 6. In Group 3, which covers several Midwest states, a negative 15.25-cents-per-gallon spread contrasted with a negative 5.5-cent spread May 3.

A wide range of other data continues to send signals that diesel markets are either holding back any upward movement in the price of crude or are trading at a spread to crude that is stuck in a tight trading range.

A simple comparison between the price of ultra low sulfur diesel and world crude benchmark Brent shows that the differential has moved little, in a range of roughly $19 to $20.50/barrel since the start of May. The average spread for March and April was about $24.30/b..

Crude also has essentially gone nowhere this month. Brent settled at $83.44 a barrel May 1. Since then, the high settlement was $83.88 a barrel on May 9, and the low settlement was $82.38 Wednesday. On Monday, the settlement was $83.71.

During that time, the front structure of the ULSD market on CME has fallen into contango, with the second-month price higher than the first-month price, a reversal of the opposite structure known as backwardation. Contango incentivizes building inventories; backwardation discourages putting a commodity — of any kind — in storage. But even with that small contango developing in ULSD, the data so far does not show any notable increase in U.S inventories of ULSD.

Inventories as measured by the weekly EIA statistics do not show a big increase in stocks that are weighing on the market.

Inventories of ULSD have been in a range of 106 million to 108 million barrels since the beginning of March.

But inventories are not just in the U.S. In his weekly report, energy economist Philip Verleger sees global stocks as putting downward pressure on product prices.

“Data on product inventories indicate a well-supplied market,” Verleger said, speaking of all petroleum products, not just diesel. “High interest rates prevent stock building. The historical data on product market behavior, given the inventory situation, indicate that product prices will likely weaken relative to crude and thus will not be creating upward pressure on the latter.”

In the report, released Sunday, Verleger looked at oil markets and concluded that weak gasoline and diesel markets were likely to hold back any significant upward move in crude prices.

Among the reasons he cited:

  • “Increased diesel exports from the Middle East to Europe will also limit upward pressure on refining margins.” While data on production from OPEC+ countries suggests the big suppliers like Saudi Arabia and the United Arab Emirates are sticking to their output cuts, “Saudi Arabia and the UAE are shipping products to Europe to maximize revenues. Production quotas accepted by oil-exporting nations do not cover products.”
  • Chinese exports of distillate such as diesel are putting downward pressure on diesel prices. Citing reporting by Argus Media, Verleger said there has been an increase in the allowable distillate exports from Chinese refiners because refining margins in China are so poor. Also citing Argus, Verleger wrote that “a product surplus pervades the Asia-Pacific market, leaving margins across the region very low.”

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