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DOE/EIA price falls as diesel market heads into Russian export restrictions

Falling along with recent declines in futures and wholesale prices, the benchmark Department of Energy/Energy Information Administration average weekly retail diesel price fell Monday after two weeks of increases. 

The decline of 8.3 cents per gallon came after back-to-back increases of 8 cents and 1.8 cents, respectively. The latest price of $4.539 is in the range of $4.53 to $4.63 a gallon, where the benchmark used for most fuel surcharges has been rattling around for eight weeks. 

By comparison, a year ago the price was $3.951 per gallon. But that was right on the doorstep of the steep market reaction to the buildup and then actual Russian invasion of Ukraine on Feb. 24.

Diesel futures prices have declined more than 78 cents a gallon since a recent Jan. 23 price of $3.5509 on the ultra low sulfur diesel contract on the CME commodity exchange. The settlement Monday of $2.7687 per gallon is almost identical to the settlement posted Feb. 2, 2022, meaning the futures price of diesel, from which all U.S. pricing begins, has gone up and down for a year almost to the day and come back pretty much right where it started on Groundhog Day 52 weeks ago. 

There has not been one overwhelming reason for the recent decline in futures prices, which has seen diesel tumble far more than crude. The spread between international crude benchmark Brent and ULSD on CME was about $1.45 per gallon on Jan. 23. On Monday, the spread between the two prices was closer to 84 cents a gallon, even as the diesel market stands on the brink of a possible major disruption. 

The recent declines in futures and wholesale prices, which tend to move in tight correlation followed by retail prices, come as the market is watching the reaction to the new restrictions on Russian diesel exports and what their impact will be. There is no clear consensus among analysts on the effect of the new rules.

The European Union ban on imports of Russian diesel (and other refined products) into its member nations went into effect Sunday. But that’s only one part of what the EU implemented. It also placed a price cap on Russian diesel of $100 per barrel to be enforced by requiring EU companies that service the waterborne oil trade, like shipping companies and, even more importantly, insurers, not provide those services to any transaction where the diesel is priced at more than $100 a barrel.

While the price of Russian diesel can be measured in several ways, it’s currently seen as being right around that $100 mark. 

The diesel price cap is similar to the $60-a-barrel cap on crude that has been in effect since early December. The primary grade of Russian crude is known as Urals. The price of Urals has been less than $60 since that time, and any sort of standoff over the EU rules has not needed to take place. Most estimates on Russian crude exports put them at little changed from before the invasion of Ukraine. 

There is another factor that may delay an impact from the rules on Russian diesel — a 55-day grace period. Any ships loaded before Sunday have that grace period before the rules kick in. Various data did show a surge in Russian waterborne diesel exports in recent weeks, suggesting a rush to get ahead of the Feb. 5 launch date of the new sanctions and take advantage of the grace period.

A recent NPR report put Russian exports of diesel to EU nations at about 700,000 barrels per day. The recent BP Statistical Review of 2022 put EU consumption of all non-jet fuel middle distillates including diesel at about 5.4 million barrels a day last year. 

As with the rules on Russian crude, the goal of the price cap is to ensure oil products from Russia can make their way into the market but at a price that limits the amount of money flowing to Moscow as it continues its war in Ukraine. 

In the crude market, oil flows have realigned with Russian crude moving farther from its usual nearby markets in Europe, which had been serviced on relatively short hauls by ports out of the Baltic and Black seas. For the Russian diesel restrictions to work as intended, those 700,000 barrels per day out of Russia going to EU countries will also need to realign and find new homes or diesel supplies overall will tighten. 

The market for distillates like heating oil is winding down, with much of the need for the rest of the winter already in the system. But inventories remain tight, with those in the U.S. of all distillates, measured in days cover, reported last week at 30.5 days. They are sitting at a level well below the five-year average for January’s fourth week of 36.2 for the five years beginning in 2017 but excluding 2021 for pandemic-related reasons. 

A gap like that can be filled relatively quickly. The recent low of 25.4 days coverage on Oct. 4 was up to 32.4 days on Dec. 9. But the number does show that even after a warm winter for most of the developed world, distillate inventories are heading into the spring at a deficit.

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