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DOE/EIA diesel price drops 2nd straight week, futures market declines too

Just when it seemed that retail diesel prices were going to rise forever, they have solidly reversed course.

The latest weekly benchmark average retail diesel price, published Monday by the Department of Energy’s Energy Information Administration, was down by 7.1 cents to $5.0763 a gallon. It was the third week in the past four that it has declined.

It is now down 17.7 cents from its March 14 price, when it stood at its all-time high, $5.25 a gallon.

However, the price is still well above where it was before its enormous surge that included a one-week increase of 74.5 cents, recorded March 7. On Feb. 28, the DOE/EIA price was $4.104 per gallon. The first price of the year was $3.613 a gallon.

And the market is set up to have further declines. The retail to wholesale price spread, as measured in the FUELS.USA data series in FreightWaves’ SONAR, was recorded Monday at $1.363 a gallon. That is significantly above the average spread, which tends to be in the $1 to $1.05-per-gallon range, though is well below the all-time high of March 16, when it came in at $1.711. It is a sign that wholesale prices, which are closely tied to futures prices and physical spot market prices, are coming down far more rapidly than retail prices. A return to a more normal spread, even if the spot price of diesel didn’t move, would take a significant amount off the current retail price.

Futures markets trended considerably lower Monday. Both crude benchmarks — West Texas Intermediate for North America and Brent for the rest of the world — settled at less than $100 a barrel for the first time since March 16. The ultra low sulfur diesel contract’s move down to $3.2677 per gallon was a decline of 4.99 cents, almost exactly what the contract gained on Friday, when it rose 4.98 cents per gallon.

Markets are now closer to their pre-Ukraine invasion prices than they are to their recent highs. The price of ULSD settled at $2.8292 a gallon on Feb. 23, the day before the invasion. Its high settlement was $4.1534 on March 24, for a gain of  just over $1.32 per gallon from pre-invasion settlement to the high water mark. 

But the settlement Monday put it about 88.5 cents less than that high price. It now stands about 44 cents more than the final pre-invasion settlement. 

Markets are being pushed lower by two key factors. One is the prospect of a continuing Chinese slowdown as the nation keeps Shanghai, its financial capital, under COVID lockdown with the looming possibility that other cities, such as Guangzhou, are headed toward similar sweeping lockdowns. 

A second factor are the growing reports that the embargo against Russian exports of petroleum, whether it’s crude or products, is starting to spring leaks. As an article in Fortune said, “Russia is still managing to sell its oil and gas by slashing prices, setting up financial work-arounds, and leveraging its position as the world’s largest exporter of such products.”

Bloomberg reported that its analysis of Russian tanker exports revealed that shipments were approximately 4 million barrels per day last week, saying that figure was up about 25% from the prior week. Russia’s total exports of petroleum generally are about 6 million to 7 million barrels per day, but a significant amount of oil moves into Europe via pipeline so it would not be seen in tanker movements. Those pipeline supplies have not been disrupted.

Another sign that oil supplies may be easing: the structure of the forward curve in the Brent market. The tighter the market, the bigger discount the market produces for oil to be loaded a year from now. That spread, known as backwardation, was at the $20-plus level just two weeks ago. It now has trended toward $5.50 a barrel, a signal that the market sees pressure on inventories easing.

One supply factor that has not commenced is the U.S. release of oil from the Strategic Petroleum Reserve. The first bids into the Biden administration’s plans to release up to 1 million barrels of oil a day for six months are due into the Department of Energy Tuesday, with deliveries to begin May 12.

There is the possibility that interest may be less than 1 million barrels a day. However, that should not be taken as a sign that the sale is a failure. Rather, it suggests the market is supplying adequate oil, for now at least, and may be taken as a bearish indication.

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