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DOE/EIA price jumps another 40 cents, but commodity diesel markets are plunging

The weekly average retail price published by the Department of Energy’s Energy Information Administration came in Monday at $5.25 a gallon, a figure that doesn’t tell the story of the volatile road it took to get there.

This week’s price marks a gain of 40.1 cents a gallon. That’s the second-largest one-week increase in the history of the series following last week’s 74.5-cent gain. And since last week’s price of $4.849 a gallon was already the highest on record, this week’s $5.25 snatches away that title.

The benchmark number that is used as the basis for most fuel surcharges has now risen by a total of $1.637 a gallon in the 10 consecutive weeks it has moved higher.  

But there were signals from the market that this price might be a high-water mark, at least for now.

The movement in the price of ultra low sulfur diesel on the CME commodity exchange, which is the first building block on the road to the retail level, has seen insane volatility in just the past few days, virtually all of it to the downside.

Last Tuesday, ULSD settled at $4.4373 a gallon. It was the highest one-day settlement in the history of the contract and rose 51.58 cents a gallon on that day. That upward move also marked the largest one-day increase in contract history.

A day later, with reports out of Ukraine and Russia that appeared hopeful for some sort of ceasefire, ULSD plummeted 97.3 cents a gallon, the biggest one-day drop in contract history coming right after the biggest one-day increase. However, that decline was actually smaller when measured as a percentage in comparison to a decline when the first Gulf War began in 1990 and quickly went the way of the U.S. and its allies.

Since then, prices have continued to decline, with two drops of 16.81 and 14.13 cents a gallon, respectively, sandwiched around an increase of 12.14 cents.

The end result of that movement is that in the past four trading days, ULSD on CME has declined $1.161 a gallon. The settlement Monday of $3.2763 was the lowest since March 1.

Retail is always the slowest price to react to commodity moves. There are signs that even before the commodity price declines of the past few days, retail had stopped its upward move. 

Based on data in the DTS.USA data stream in FreightWaves’ SONAR, the average retail price in the U.S. had been slightly above $5.13 for four consecutive days. That was before the declines in the commodity and wholesale prices of the past few days had an opportunity to put downward pressure on retail levels.   

Wholesale prices, however, move in close sympathy with commodity price moves. With the decline in prices on the CME, national average wholesale prices in the ULSDR.USA data stream in SONAR declined to $3.755 a gallon Monday from $4.569 Wednesday.

What has caused the market to take a downturn? Appearing on CNBC’s Squawk Box Tuesday, Amrita Sen, the founder and  chief analyst at Energy Aspects, cited several reasons why oil prices have shed more than $1 a barrel in just a few days.

Sen said that while there has been focus on official and unofficial embargoes of Russian oil exports, “Russian oil is getting to market.” However, she added that the cargoes that tanker trackers are showing being exported were for barrels booked before the Russian invasion of Ukraine, and that they are not likely to be followed by further oil trade.

Sen said China and India are expected to take some of the embargoed Russian oil, though the precise amounts remain unclear. 

Additionally, Sen said, Russian oil that gets to market by pipeline continues to do so because that is all under contract, unlike cargoes of oil that are offered into the open market. Russia ships roughly 1.2 million to 1.4 million barrels per day on the Druzhba pipeline, which serves Eastern Europe and actually goes through Ukraine. 

That oil continues to flow through Druzhba is not news; the line never stopped operating even when the war began. 

Germany, which does not get oil from the Druzhba but instead is served by waterborne crude, is starting to cut its imports of Russian petroleum. Reuters reported that the German Fuels & Energy Association said in response to a question, “The mineral oil industry has started reducing imports of Russian crude oil and mineral oil products, especially diesel.”

Another global development cited for the recent decline in prices is that China is dealing yet again with a resurgence of COVID-19, this time primarily in the large city of Shenzhen. China is the world’s largest importer of crude, and its determination to fight COVID-19 by shutdowns has always been seen by oil markets as a potential drag on demand.

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