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Small drop in DOE/EIA diesel price lags broader oil market declines

With global oil markets taking a breather for a few days, the benchmark diesel price caught up somewhat with recent broader declines followed by three consecutive days of relative stability in what had been a wild ride. 

The weekly Department of Energy/Energy Information Administration diesel price fell 3.1 cents, to $5.084 a gallon. The decline marks the 10th week out of the past 11 that the benchmark price, used as the basis for most fuel surcharges, has dropped. The first nine weeks of that decline took the price down 90.1 cents a gallon. The big increase in the Aug. 29 price took it back up 20.6 cents, and now 3.1 cents of that increase has been clawed back by the latest lower posting.

Retail diesel prices still have a ways to go to get closer to the historical spread between retail and wholesale prices. The latter have been sliding alongside an earlier drop in futures prices. Wholesale diesel prices as measured by the ULSDR.USA data series in SONAR have fallen from a national average of $4.19 a gallon on Aug. 27 to $3.863 a gallon Tuesday, a decline of 32.7 cents. But retail prices as measured by DTS.USA in SONAR actually rose during that period, to $5.088 a gallon from $5.074 a gallon on Aug. 27.

Oil markets in general fell sharply before these past three days of relative quiet. The benchmark ultra low sulfur diesel contract on the CME commodity exchange settled at $4.0076 a gallon on Aug. 26 and plummeted roughly 44 cents in just the next four trading days, to $3.5612 a gallon Thursday. After relatively minor moves Friday and Tuesday — there was no settlement Monday due to the Labor Day holiday — the ULSD price settled Tuesday at $3.5738 a gallon. 

But the market doesn’t need to go all that far back to find a lower price: $3.5411 a gallon on Aug. 18. These are swings that are severe enough that the market is destined to have enormous nontraditional gaps between wholesale prices — which track futures prices relatively closely — and retail prices, where markets are not set up to react quickly to such vast movements.

Another sign of market stability in recent days is coming from the physical diesel price in the U.S. Gulf, one of the world’s most important physical markets. Its spread against the CME ULS price settled Tuesday at minus 4.25 cents, according to DTN, weakening slightly in recent days. That spread is reflective of more near-term markets, as it is for diesel to be delivered in the next few days as opposed to the CME ULSD price, which is for New York Harbor delivery one month forward. The slight weakening of the physical spread, even in a time of extremely tight inventories, should be seen as a comforting sign to diesel buyers.

The overall decline in oil prices in recent days can be seen in the decline in Brent crude oil, which settled Tuesday on CME at $92.83 a gallon, having shed $12.26 in just five trading days, with most of that drop coming in the first three days of that period. 

Markets remain concerned about a loss of demand resulting from a global slowdown in activity. That sentiment is so strong that it is overcoming sharp increases in recent weeks in global natural gas prices. The two commodities are not directly linked, but strong rises in one can often spill over to the other, particularly in diesel, where some natural gas applications will turn to diesel as a substitute fuel during times of high natural gas prices. 

But for diesel, the most important natural gas number recently has been the Dutch TTF price, considered the European benchmark. Dutch TTF prices are quoted in euros per megawatt hours and have fallen just since last week to 236 euros ($233.80) from 350 euros as recently as Aug. 27.  

The OPEC+ group backed that concern about weakening markets on Monday with a mostly symbolic reduction in output of 100,000 barrels a day for October. But as S&P Global Commodities Insight said of the reduction, “In practice, however, with the bulk of OPEC+ countries already struggling to reach their quotas, not much supply will be lost.”

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