The benchmark price used for most diesel surcharges crashed down through the symbolic $4-per-gallon mark for the first time since February 2022, even as the broader futures market suddenly has posted significant gains after recent declines.
In coming in at $3.922 a gallon, the Department of Energy/Energy Information Administration posted the biggest one-week decline since just before Christmas. The 9.6 cents-a-gallon drop was the largest since a 15.8-cent decline on Dec. 19. It also marked the 13th time in the past 14 weeks that the price has dropped.
The last time the DOE/EIA price was less than $4 was Feb. 7, 2022. A week earlier was the last time it was below Monday’s price, coming in on January 31, 2021 at $3.846/g.
Markets then began moving higher, in anticipation of the Russian invasion of Ukraine, which took place on Feb. 24. Retail markets as measured by the DOE hit a peak of $5.81 a gallon on June 20, so the latest price marks a decline of $1.888 a gallon since then.
But the decline Monday comes as futures markets suddenly have turned higher in just the past three trading days.
When ultra low sulfur diesel on the CME commodity exchange settled Wednesday at $2.2323 a gallon, it marked the lowest first-month settlement since December 2021.
But since that day, ULSD and other oil prices have posted significant gains. Monday’s settlement at $2.3777 a gallon marked a gain of 14.54 cents in just three trading days.
There has been no significant news driving oil markets higher. Most of the reasons cited by analysts have tended to focus on macroeconomic factors, such as last week’s healthy jobs report that might make the Federal Reserve hesitant to put on the brakes.
The one specific change in the oil supply/demand picture came in the past few days when the Canadian province of Alberta declared a state of emergency due to wildfires that have shut in 185,000 barrels of oil equivalent per day, according to various news reports.
That amount is about 2% of Canada’s daily output, the reports said.
If there is a particularly bullish sign coming out of the diesel markets, it is inventories. U.S. inventories of ultra low sulfur diesel declined in the week ended April 28 to 99.62 million barrels. That figure is rarely less than 100 million barrels, though it did get to that level last spring and in the fall. Both those periods saw retail diesel prices well above $5 a gallon; now with inventories that low, they are less than $4 a gallon.
And they are likely to get tighter. On the analyst call for the first-quarter earnings at Marathon Petroleum (NYSE: MPC), Brian Partee, the company’s senior vice president for clean products, said the market for diesel in agriculture is expected to be a “strong season.”
On the same call, Marathon CEO Michael Hennigan said the company is seeing diesel demand in Latin America up 10% from last year and China is up 4%.
Meanwhile, Brian Mandell, an executive vice president at Phillips 66 (NYSE: PSX), also said a lot of refineries are running maximum gasoline output, which means less distillate and diesel being produced. As he said, “This bodes well for helping firm up distillate through the summer.”
The recent decline in diesel futures prices has seen diesel run stronger than increases in crude. The spread between front-month Brent crude and ULSD was about 54.4 cents a gallon Monday, after being under 49 cents a gallon just six days earlier.
Another place where diesel is strong is at the retail level relative to wholesale prices. The FUELS.USA data series in SONAR, which measures the spread between retail and wholesale, stood Monday at just under $1.50 after being as high as more than $1.57 a few days ago. While that spread has been highly volatile since the Russian invasion of Ukraine and before that, the current levels are higher than historic norms, which tend to be in the $1 to $1.10 level. That suggests that while retail diesel prices may get pushed higher by increases in the futures price and by extension wholesale prices, there may be downward pressure coming from retail prices moving closer to their historic spread against wholesale numbers.