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Commodity diesel prices bounce back, retail still reacting slowly

After two days of sharp drops in spot commodity and wholesale prices, the key commodity price for diesel ended up more than 7 cents on the day Wednesday, while drivers waited for retail prices to fall on the back of earlier declines in commodity and wholesale diesel prices.

Ultra low sulfur diesel (ULSD) on the CME commodity exchange settled Wednesday at $3.1001 a gallon. That is up 7.04 cents a gallon from the prior day.

Trading over the course of the day turned in what is becoming a typically volatile performance.  Prices recorded on the exchange for ULSD ranged from $2.9439 a gallon to $3.0951 a gallon, a swing of more than 15 cents. 

But even that one-day movement pales compared to the trends of the last few days — swings so wild not just in ULSD but in crude and gasoline as well. Open interest on the CME commodity exchange is plummeting as traders exit a market exhibiting volatility that even the most experienced traders have never seen. 

From its peak settlement of $4.4373 a gallon on March 8, an all-time high for the CME contract, ULSD plummeted to settle Tuesday at $3.0297 a gallon before its bounce-back Wednesday. 

With that sort of decline in commodity prices has come a big drop in wholesale diesel prices, which generally track commodity price movements closely but not in perfect correlation. 

On March 9, the average national wholesale diesel price according to the ULSDR.USA data series in FreightWaves’ SONAR dashboard was $4.569 a gallon. The wholesale diesel price that day would have been mostly reflecting the commodity and spot market prices of the prior day, March 8, the record-high settlement.

Since then, wholesale prices have been plunging alongside spot levels. The ULSDR.USA price for Tuesday was $3.401, down $1.168 from the March 9 price. However, that is still less than the roughly $1.40 drop in the CME ULSD price between March 9 and Tuesday of this week.

Meanwhile, retail prices have not moved significantly. Average retail prices according to the DTS.USA price series in SONAR peaked at $5.134 a gallon on Friday. On Wednesday, they were $5.112 a gallon.

But a comparison of the posted retail prices at Pilot Flying J, through its downloadable spreadsheet of all the pump prices through the almost 900-outlet system, shows that there are reductions at the retail level. A comparison of the average price Wednesday compared to Tuesday shows a reduction of 6.68 cents a gallon. 

Oil companies have little control over retail prices, except in the dwindling number of company-owned retail outlets. The individual owners of retail outlets have the power to set their own pricing, though a retail outlet that sets its prices extremely high or extremely low might get a call from their supplier, wondering what’s going on.

On Wednesday, President Biden took note of the general stability of retail gasoline prices — which are moving at the same slow pace as diesel prices — and criticized oil companies for not reducing their prices.

But as the ULSDR.USA data series shows, companies are reducing their prices at the wholesale level, which is the last pricing point for what most people associate with what they define as oil companies, firms such as ExxonMobil or Chevron. 

As wholesale numbers have tumbled and retail prices have stayed steady, it has caused a historic rise in the FUELS.USA data stream in SONAR. That number reflects the difference between the average retail wholesale diesel price and the average retail price.  

FUELS.USA Wednesday hit its highest level ever at $1.711 a gallon, compared to the previous record high of $1.649 a gallon reached during the start of the pandemic. That situation from two years ago was similar to the present market, with spot and wholesale numbers tumbling as demand evaporated but moves in retail diesel prices lagging far behind. 

The record number in FUELS.USA Wednesday is even more stunning compared to the record-low level of 32.9 cents a gallon on March 9, when retail prices had not yet started to move upward on the heels of much higher wholesale and commodity prices.

The decisions being made on the ground to delay retail reductions, even as wholesale numbers are falling, are being made by retailers both large and small. Companies can own hundreds of outlets; sometimes they might own just one. And they generally hold on to higher prices as long as they can, right up until the point that a competitor looks at a cheaper load of wholesale gasoline and realizes that cutting the street price of fuel can snag more market share for gasoline or diesel — or higher sales in the attached convenience store.

Where the falling price of wholesale diesel helps truckers is if they have fuel acquisition formulas tied to wholesale prices. They would not be buying at 100% wholesale but would be on a formula of wholesale plus a differential. The differential would have been set originally to produce an end-user price roughly in line with retail diesel. 

But with wholesale blowing out to a negative differential higher than in anything in history, a wholesale-based price for retail diesel would be a significant short-term lift for a transportation company buying fuel that way.  

The overriding news of the day Wednesday was the monthly report of the International Energy Agency. It reduced its forecast for global demand by 1.3 million barrels per day for the second quarter through the end of 2022, which when combined with projected growth for the first-quarter results in a full-year 950,000 barrels per day reduction in projected growth.

The report also projects that as the “self-sanctioning” of Russian exports continues, the inevitable shutting in of Russian production will total 3 million barrels per day. That number is against the new estimated average oil market size of 99.5 million barrels per day for the year.  

An equation is starting to develop in oil markets. If Russian output is going to drop by 3 million barrels per day on the supply side, how can that be offset? Part of it is demand destruction, and that’s where the 1.3 million barrels-per-day IEA figure for lost demand over the last three quarters of the year is important.

Successful negotiations with Iran over its nuclear program and its concurrent sanctions could result in another 1 million barrels per day coming back on to the market. U.S. output is expected to rise by 800,000 barrels per day to 900,000 barrels per day this year, but that already is baked into the supply/demand forecasts for 2022. Higher output is possible but does not appear to be likely. 

A move to ease sanctions against Venezuelan exports could result in further supply, but the amount is not clear. The poor state of the Venezuelan industry may mean it is in no position to significantly increase its oil output. The IEA said it believed Venezuela could increase output by 200,000 to 300,000 barrels per day. 

The IEA report estimated that in February, the OPEC+ group of OPEC exporters and non-OPEC exporters led by Russia added less than the 400,000 barrels per day it has pledged to add monthly since last April. OPEC+ has turned in “chronic” underperformance in its projected increases, the IEA said. And the agency added that even if it hit the 400,000 barrels per day mark each month, “assuming that OPEC+ continues to pump as per its agreement, the higher volumes would not make up for a large-scale disruption from Russia.”

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