Watch Now

Benchmark diesel price down again but futures price turns higher

Refining cutbacks during cold snap come on top of already lower operating rates

The benchmark DOE/EIA diesel price rose for the seventh consecutive week. Photo: Jim Allen/FreightWaves

Retail diesel prices continued their slide as measured by the Department of Energy/Energy Information Administration, even as diesel in the futures and wholesale market has taken a decidedly upward turn.

The price published Tuesday by the DOE/EIA is the benchmark for most fuel surcharges and came in at $4.537 a gallon, a decrease of 5.9 cents. That price now has declined seven consecutive weeks for a total decrease of 80.4 cents a gallon.

Retail prices lag futures moves so the pump price is not yet showing what could be viewed as a significant upturn in the price of ultra low sulfur diesel (ULSD) on the CME commodity exchange. Wholesale diesel prices generally track futures and spot physical prices with a high degree of correlation.

ULSD settled Monday at $3.3362/gallon, an increase of 7.01 cts/g, or 2.15%, on the day. Since a recent low settlement of $2.787 a gallon on Dec. 7, the futures price of ULSD has now risen just under 55 cents per gallon. Tuesday’s settlement is the highest since Nov. 30.

Various reasons have been cited as potential forces that have added that much to the futures price, a gain of almost 20%.

Increases on Friday and Tuesday are believed to have been driven in part by a fairly significant loss of refining operations in the Gulf Coast beginning late last week, due to the sharp cold that made its way into the Houston-Beaumont refining area. 

S&P Global Commodities Insights, which houses the legacy Platts operations, reported that about 3 million barrels a day of refining capacity has been affected by the cold weather. But SPGCI quoted Rick Joswick, the head of global oil analytics, as noting that while the 3 million barrels per day is a large amount, it did not come with the power outages that put 5.6 million barrels a day of capacity offline during the February 2021 deep Texas freeze. 

And while temperatures were above freezing by Monday in the Gulf Coast region, the speed at which the capacity can return varies.

The impact of that lost capacity can most clearly be seen in physical market differentials. DTN reported that the price of spot ULSD in the Gulf Coast closed Tuesday at 2 cents under the CME ULSD price. On Thursday, the last day DTN posted a price prior to the holiday weekend, that spread was minus 14.5 cents a gallon, and it was as wide as minus 20 cents per gallon as recently as Dec. 19.

Physical spreads have been declining significantly from strong levels in November. For example, DTN assessed the Gulf Coast physical diesel spread at +5.75 cents a gallon on Nov. 2. Physical markets trade for pipeline or barge barrels within a few days out from the date a price reporting agency like DTN assesses, so the prices quoted now are against the futures price for January barrels.

But as diesel demand weakened and refineries came out of maintenance at high operating levels, tight inventories eased. Total U.S. inventories of ULSD rose from 94.3 million barrels in the first EIA report of October to hit 109 million barrels in the most recent report for the week ended Dec. 16, putting that figure not far below the five-year average for that date. 

Those strong margins of November and the end of most seasonal maintenance that month led to U.S. refineries running at more than 95% utilization in the two weeks straddling the start of December. All that helped to create the weakening physical market that saw the Gulf Coast physical spread drop to minus 20 cents just five trading days ago. 

But by the week ending Dec. 16, refinery operating rates had slipped to 90.9%, likely pushed downward by the weakening margins. As a result, physical spreads that had weakened against the rush of new supply from cranked-up refineries now have strengthened, boosted by the combination of cold-driven cutbacks on top of the sliding refinery rates already in place. The result was evident in the minus 2-cents spread recorded Tuesday, up 90% in just a few days. 

But not only is that spread in the Gulf Coast strengthening, the spread between diesel and crude is as well. A simple comparison between the front month price of ULSD and Brent crude shows a spread Tuesday that settled close to $1.33 a gallon. On Dec. 19, it was approximately $1.15.

More articles by John Kingston

Decade-long misclassification case against Hub settled for roughly $5 million; California’s ABC test loomed in the background

Wells Fargo lowers stock rating amid wait for TriumphPay’s profitability

M&S expert: Hot market for logistics acquisitions isn’t cooling 

John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.