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Diesel price down, but impact of Russian sanctions may be lifting rates overall

The benchmark price for most diesel fuel surcharges fell Tuesday even as diesel futures took an upward move completely at odds with the rest of the petroleum market, possibly signaling that sanctions against Russian diesel are having an impact.

The Department of Energy/Energy Information Administration price, published a day later than usual due to the Presidents Day holiday, dropped 6.8 cents per gallon Tuesday to $4.376. It’s the lowest price since the $4.104 posted almost exactly a year ago, the final rate published by DOE/EIA on Feb. 28, 2022, that would not have felt the full impact from Russia’s invasion of Ukraine just a few days earlier.

Tuesday’s DOE/EIA price came even as diesel futures on the CME commodity exchange took a sharp move higher Monday despite declines in the settlement price of other futures contracts in the petroleum complex. Ultra low sulfur diesel on the CME rose almost 8 cents a gallon to $2.7919, an increase of 2.86%. 

Meanwhile, West Texas Intermediate crude dropped 0.24% to $76.16 per barrel, Brent crude declined 0.6% to $83.05 a barrel and RBOB gasoline, which is essentially without ethanol blended into it, declined 0.31% to $2.4156 per gallon.

The spur to the rise in diesel in contrast to the decline in other oil prices was a renewed focus on oil market sanctions against Russia. 

All eyes have been on diesel since the start of European Union sanctions that capped the price of Russian diesel at $100 a barrel. Oil sold for that anywhere in the world would find itself cut off from the extensive network of EU-based ship owners and insurers, though EU policymakers ultimately hoped that oil would find a home, albeit at a capped price.

The $100-per-barrel cap applies to all Russian products, though the country is an insignificant exporter of gasoline. Fuel oil — the “bottom of the barrel” that’s sold for electricity generation and powering manufacturing and heavily exported by Russia — is generally priced far below diesel. The possibility of fuel oil bumping up against the $100 price is unlikely in the short to medium term. 

But Russia is a major exporter of diesel, so the impact of the EU sanctions would be felt on that product.

According to a Bloomberg article Tuesday, which appears to have spurred the increase in diesel relative to the rest of the barrel, “the early signs are that (the sanctions) are having at least some of the desired effect.”

The article, citing data from Vorttexa, reports the price of Russian diesel has fallen, relative to other grades of diesel in Europe, and export figures for the country’s diesel are only slightly down from January.

It could be argued that if the EU system is working as planned, the reaction should be bearish. The idea behind its plans is to ensure Russian oil supplies do make it on to the market but at a capped price that restricts the amount of money flowing to Moscow.

The ban on imports of Russian diesel into the EU also appears to be holding. An article by S&P Global Commodities Insights last week said Spain had denied entry into one of its ports by a ship that was flagged as a Singapore vessel but was carrying products that had been on a Russian ship. 

Although the futures price of diesel rose Monday, physical diesel spreads in the U.S. are not increasing. Those spreads are the differential for physical barrels traded in markets such as the New York Harbor or the U.S. Gulf Coast, and they are priced at a discount or premium to the CME ULSD price.

For example, the differential in New York Harbor was flat to the ULSD price on Feb. 9 and 10. On Tuesday, it was negative-2 cents.

Some of the recent decline in retail diesel prices had come as a result of pump prices catching up to earlier drops in wholesale prices, which generally track futures market moves closely. For now, that trend appears to have run its course.

The FUELS.USA data series in FreightWaves SONAR is a simple calculation reached by taking the average U.S. diesel price in the DTS.USA retail price data series and subtracting from it ULSDR.USA, a data series of average wholesale diesel prices. 

The FUELS.USA number in early December reached almost $2.25 per gallon, far above historic norms near $1 to $1.10 as retail prices lagged rapidly declining futures and wholesale diesel rates. The decline in pump prices paralleled a narrowing of that wholesale-to-retail spread, with retail figures in December and January declining far faster than the fall in futures and wholesale prices.

But while FUELS.USA stood at about $1.49 a gallon a week ago on Feb. 13, it came in Tuesday at $1.59. That means the recent decline in retail prices reflected in this week’s DOE/EIA rate is coming on the back of declining wholesale and futures prices, which before Monday’s increase dropped almost 21 cents last week.   

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