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Benchmark retail diesel price above $4/g, first time since March 2014

For the first time since St. Patrick’s Day in 2014, the national average diesel price has crossed the $4/gallon mark.

With a gain of 6.8 cts/g, the benchmark price published by the Department of Energy’s Energy Information Administration came in at $4.019/g. The price on St. Patrick’s Day in 2014 was $4.003/g.

The lowest post-pandemic DOE price was $2.372/g, posted on Nov. 2, 2020. Since then, the DOE/EIA price has tacked on $1.647/g, with 40.6 cents of that coming in just the last six weeks.

Retail prices moves lag those of the the commodity and wholesale markets, suggesting that prices have further to run. The price of ultra low sulfur diesel on the CME commodity exchange settled Monday at $2.9618/g, up 16.92 cts/g just in the past four trading sessions. 

However, national wholesale diesel prices as measured in the ULSDR.USA data stream in SONAR have been more moderate, rising just a few cents in the past week though crossing its own significant mark of $3/g. 

To learn more about FreightWaves SONAR, please go here.

With crude sitting just below $100, analysts are arguing whether prices are being boosted to a large degree by the prospect of war between Ukraine and Russia or how much is the market being lifted by a fundamental supply/demand imbalance.

Forecasts for the first half of the year by agencies such as the International Energy Agency were predicting a growing supply/demand imbalance, with supplies outstripping demand, putting downward pressure on prices.

That obviously hasn’t happened. But if the market was climbing solely on the basis of war-related fears, it might not be showing up in the month-to-month spreads. In a tight market, the highest price along the calendar is the current price. Prices drop along the calendar in a situation known as backwardation. It is a sign of tight inventories. 

Backwardation might not be growing if the market’s rise was driven solely by short-term war fears. But it is growing, and considerably. For example, the spread between front-month Brent crude and Brent 12 months out settled Monday at the eye-popping level of $12.77/barrel. On the first trading day of the year, it was $6.90. 

Analysts are looking at the issue of demand destruction: When does the price of oil get high enough that it begins to hit consumption? 

In a report released Monday, RBC Capital Markets noted that when adjusted for inflation, the current price of oil is still far less than that of the all-time peak in 2008. Current gasoline prices in the U.S. near $3.45/gallon are still well below the roughly $4.10 levels seen in the summer of 2008, and that price now equates to more than $5.20 per gallon when adjusted for inflation. 

“While current pricing is high, levels are still 50% below previous levels of evidenced demand destruction on an inflation adjusted basis,” RBC wrote. 

Looking at those numbers, RBC concluded that “there is meaningful upside running room before demand destruction potentially takes hold.”

The most prominent market bear is Ed Morse, the legendary head of commodity research at Citi. Morse has been noting the supply/demand balance story that has been prevalent in the market for the past few months. 

In an interview with Bloomberg on Monday, he expressed doubt that a shooting war between Russia and Ukraine would have a significant impact on supplies, though there might be some slowdown in output. But after that, Morse said, “We think the supply situation will go back to normal and then over the course of the year, all the bearish factors we see on the supply side will still come into the market.”

One of those factors could be seen in a report published Monday by the EIA. In its well productivity report, the EIA estimated that oil output from the Permian Basin in West Texas will increase 71,000 barrels per day in March to 5.205 million b/d, which would be a record. 

The agency also predicted that total output in all U.S. shale basins would rise to 8.707 million b/d, the most since the pandemic took hold in March 2020, according to a report from Reuters.

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