The benchmark diesel price used for most fuel surcharges ticked down a couple cents Monday in the midst of the diesel futures market having turned in a significant seven-day streak of declines.
The Department of Energy/Energy Information Administration average weekly retail diesel price published Monday was down 2 cents to $5.313 a gallon. This is the fourth consecutive week during which the change in the price was less than 3 cents either way: an increase of 0.2 cents, followed by a decline of 2.4 cents, an increase of 1.6 cents and the Monday drop of 2 cents.
It’s significant because the four weeks of relative stability come after six consecutive weeks of moves greater than 5 cents, including two weeks of enormous increases: 38.8 and 11.5 cents.
Retail prices are the ultimate lagging indicator. So the 2-cent drop this week is in stark contrast to what has happened in futures markets, where prices have declined seven consecutive trading days, and in the East Coast market where new signs of a squeeze are emerging.
Since a settlement just under $4 a gallon on Nov. 3, the price of ultra low sulfur diesel on the CME has declined 45.49 cents per gallon to get to the Monday settlement of $3.544 a gallon. The settlement in ULSD Monday was well below its intraday high of $3.7037 a gallon. That early surge in prices was believed to have been boosted by weather reports that much of the U.S. is about to embark on as much as two weeks of temperatures below normal.
The question is why the price of diesel has been plummeting, not just on an outright basis but also relative to crude. Diesel was as much as $1.75 a gallon higher than Brent crude on Nov. 3 but recently has slid to about $1.25 a gallon higher.
Two theories on the recent drop in diesel have been discussed. One is the continued warm weather in Europe, where natural gas injections into storage have remained net positive. By now, European storage is generally seeing net withdrawals. But warm weather continues to allow storage to build, keeping the key Dutch TTF natural gas price — Europe’s benchmark for pipeline natural gas — in check. It has traded in a narrow range for several weeks and is down about 65% from its August high. That reduces the probability of diesel substitution for natural gas consumption.
The second is the expectation that refiners that are coming back online after fall maintenance are going to try to maximize their diesel output because even with the recent decline in the diesel-Brent spread, it remains far more profitable than making gasoline. That $1.25 spread in diesel Monday contrasted with one for gasoline of about 65 cents.
U.S refinery operating rates in the week ended Nov. 4 were reported by the EIA at 92.1%, a not insignificant 150-basis-point increase. S&P Global Commodities Insight, in its weekly forecast of the upcoming EIA statistics, said it expects the operating rate this week to be up an additional 50 bps.
But while those factors are bearish, the reality is that the recent decline in prices is still coming up against tight inventories. The question is how those stocks are faring against levels of consumption, which are dictated to a certain degree by the numberof trucks on the road.
For example, in the EIA inventory report released Wednesday, total U.S. inventories of non-jet distillates, which are about 85% to 90% diesel, declined about a half-million barrels, to 106.3 million. But the days cover figure — which represents the amount of consumption that could be covered by inventories alone — rose to 26 days from 25.8 days. This is the number that spurred the inaccurate observation that the U.S. was “going to run out of diesel in 25 days.”
Days cover rose despite the decline in the size of inventories because total nonjet distillate consumption declined to 4.161 million barrels a day from 4.257 million.
On the East Coast, short-term physical markets are again showing extreme tightness. While the CME ULSD contract is for delivery in New York Harbor, it is for deliveries one month out. So a trade concluded Monday could be for delivery on Dec. 1; it could also be for delivery on Dec. 31.
That won’t reflect what is happening now. The DTN end-of-day assessment of what is known as “prompt” East Coast ULSD was $4.5504 a gallon, an increase of 11.37 cents from Friday. That means the physical market for East Coast diesel rose 12.5 cents more than the change in the December CME contract.
And although retail prices are a lagging indicator, they are showing that squeeze. The DOE/EIA price for New England released Monday was up 9.05 cents a gallon to $6.06, the first time that price has been above $6 a gallon in New England since a run of several weeks above that mark in the spring. Before that, no region had ever posted a price above $6 a gallon.
Meanwhile, the area designated as Central Atlantic had an average retail diesel price last week of $5.989 a gallon, just below the $6 mark. That was only an increase of 1.2 cents a gallon. The Central Atlantic posted several weeks above $6 in the spring alongside those in New England.