The benchmark diesel price used for most fuel surcharges rose Monday by the smallest increment used by the Department of Energy/Energy Information Administration, which publishes the number.
Average retail diesel prices for the week rose 0.1 cent per gallon to $3.54. It’s the second consecutive week the price has risen.
The increase came despite the fact that outright prices in the ultra low sulfur diesel (ULSD) contract on CME have dropped significantly in the past week. After settling Nov. 22 at $2.2749 a gallon, they moved down four of the next five trading days – there was no settlement Thanksgiving Day – to settle Monday at $2.1777 a gallon, a drop of almost 10 cents per gallon, or 2 cents a gallon a day since a week ago Friday.
With the market generally seen as having been propped up by Middle East conflict, the news of a potential ceasefire between Israel and Hezbollah in Lebanon helped push markets lower last week. A stronger dollar also is a contributing bearish factor, as dollar-based commodity prices tend to move inversely from the movements in the value of the greenback.
Oil markets have been sliding as the market heads toward a full meeting of the OPEC+ group that begins Thursday. It was initially scheduled to begin Sunday but was postponed.
OPEC+ has had production cuts in place since April 2023. The OPEC+ group is made up of the OPEC nations plus a group of non-OPEC oil exporters nominally led by Russia. The group’s cut of 2.2 million barrels a day in production has been in place since the end of last year, coming on top of cuts first agreed to first in spring 2023.
Those cuts were set to be wound down on a schedule into 2025 starting in September. But that was delayed until December, and the expectation now is that it will be delayed further.
Speaking to CNBC Monday, Amrita Sen, the founder and director of Energy Aspects, said her firm believes the Thursday meeting will roll over the existing cuts and abandon plans to begin reducing them this month.
“The biggest thing is that OPEC+ will not add to a surplus market,” Sen said. She noted that inventories globally traditionally build during the fourth quarter and that Saudi officials “have always been talking about how they want to ensure the fact that inventories remain in check, and I think they will be consistent with that.”
Sen, in the interview, did not see any signs that the market is ready for a turn, based on supply/demand fundamentals. She also pushed back against market chatter that OPEC+ in general or Saudi Arabia in particular is ready to claw back market share by flooding the market, leading to marginal producers pulling back their output because of lower prices.
“I don’t buy that at all,” she said. “I think that’s definitely not what we’ve seen from OPEC+ for the last few years. Why give up all the hard work they have put themselves through?”
Sen added that there are market uncertainties: tariffs that might have an impact on demand, and sanctions on Iran and Venezuela under the Trump administration that could impact supply. “So I think OPEC+ is going to give themselves wiggle room to not announce something that ties them in for the full year,” Sen said.
One aspect of inventories that needs to be watched: the front-month to second-month spread for ultra low sulfur diesel traded on the CME commodity exchange has flipped into backwardation in recent days.
In a perfectly balanced market, the second-month price is higher than the front month, the third month is higher than the second and so on. That escalator reflects the time value of money and the cost of storage. The structure is called contango.
But when inventories are tight and the most valuable barrel is the one for the earliest delivery, the market moves into a structure known as backwardation, with the second month lower than the first, the third month lower than the second, etc.
The spread between the front month and second month in the ULSD contract has been in contango for several months. On Friday, it moved into backwardation, which could be seen as reflecting tighter inventories.
Settlement data for Monday was not immediately available, but intraday data suggests the market was in a slight contango. However, the size of the contango has been gradually tightening for weeks, which could reflect concerns about inventory levels.
Current weekly Energy Information Administration reports on ULSD inventories show stocks to be relatively healthy for this time of year.
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