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Benchmark diesel price up but futures markets take big downturn

Just as the benchmark Department of Energy/Energy Information Administration diesel price posted a second consecutive weekly increase, prices in futures and wholesale markets are headed south again.

The price used as the basis for most fuel surcharges rose 1.8 cents a gallon to $4.622 per gallon. That came after last week’s increase of 8 cents a gallon. But those increases stand out in a long line of price drops; since a recent high of $5.341 a gallon on Oct. 24, the DOE/EIA price has declined 71.9 cents a gallon.

And more declines may be coming. The price of diesel on the CME commodity exchange has come almost full circle since a settlement of $3.0865 a gallon on Jan. 3, the first trading day of the year. It dropped to $2.9719 a day later, the lowest of the month, climbed back as high as $3.5509 per gallon on Jan. 23, and has since plummeted to its Monday settlement of $3.1108 a gallon, just about 2.5 cents more than that first day’s settlement, with a wild ride in between. 

Wholesale diesel prices follow trends in futures markets, though not necessarily with a 1:1 correlation. The national average wholesale diesel price as reflected in the ULSDR.USA data series in SONAR has seen a drop to $3.392 a gallon Monday from $3.634 just last Tuesday, as wholesale prices have tracked the big slide in futures numbers.

The recent bearishness in the market appears to be rooted in several factors. Part of it is a rush of supply in the face of the pending European Union ban on imports of Russian products, including diesel, that takes effect Feb. 5. Argus Media reported that the EU, in the week leading up to Jan. 29, imported about 146,000 metric tons a day of diesel and gasoil, a diesel-like product, when the normal number is about 88,000 tons a day. Argus cited data from Vortexa, a U.K.-based oil trade data supplier.

Separately, S&P Global Commodities Insight reported thatthe European diesel market may be undergoing “significant tightening” after the sanctions take effect regardless of the recent rush to import other sources of diesel.

The ban on Russian diesel imports into the EU comes with a price cap that ship insurers, overwhelmingly based in the EU, are required to follow. The goal is to allow Russian oil into the market but at reduced prices to help limit the amount of revenue flowing to Moscow. 

That has largely worked with crude, where Russian seaborne crude exports, according to Bloomberg, were 3.6 million barrels a day in the week ending Jan. 27, roughly in line with prewar levels.

Relative to Brent crude, the international benchmark, diesel not surprisingly has been as volatile as the outright price and took a significant decline Monday. Measured in dollars per barrel, ULSD on a comparison of the front month ULSD vs. Brent, normalized to dollars per barrel, shows a spread of about $50-52/barrel between Jan. 11 and 18. The spread shot up to more than $60 a barrel three days later and plummeted Monday to about $45 a barrel as diesel continued to go through its wild swings.

U.S. inventories of all distillates, including diesel, stood at 31.8 days’ cover in the most recent weekly EIA inventory report, for the week ending Jan. 20. While inventories had been a concern going into the winter and had tightened to historically low levels, the days cover figure — the number of days of consumption that can be covered by inventories alone with no additional production or imports — was 31.8 in the most recent report. That figure has been steady between 31.6 and 32.9 for the past five weeks. 

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