Benchmark price is up, futures down, diesel on its own

Given the lag in retail changes, the price would not have been expected this week to reflect the sharp fall in futures prices that began when trading opened for the week Sunday evening U.S. time. That decline followed lower prices Friday that were seen not as a reversal of the market but more of a “breather” after several days of sharp increases.

Possible peace?

The cessation over the weekend of what had been nightly U.S. attacks on Iran, and other rumblings of negotiations, led to higher futures market prices the first two days of this week. 

However, for diesel consumers, the more salient development is that once again, the price of that fuel did not match the fall in the price of crude. 

For example, on Monday the price of world crude benchmark Brent fell $8.42/barrel, settling at $88.36/b. It had settled above $100 just two days earlier. The decline marked a drop of 8.7%.

But also on Monday, the price of ultra low sulfur diesel (ULSD) on the CME commodity exchange declined 6.9 cts/g to settle at $4.1116/g. That was a slide of just 1.65%, far less than the plunge in Brent.

Spread like no other

It led to what appears to be a historic new number: if Brent was converted to cents per gallon and subtracted from the ULSD price, the number would exceed $2/gallon. There is no recent record of that ever occurring.

It is far from a perfect comparison, because front month Brent is for September barrels and front month ULSD is for August, so the crude can not turn into diesel to be delivered next month. But the relationship still shows how disconnected the two markets  have become. 

On the last trading day before the U.S. and Israel launched its attacks on Iran, that spread was about 87 cts/g.

At approximately 11:30 a.m. Tuesday, the spread had widened. Brent was down about 9.7% and ULSD was down about 0.2%.

What it means is that any diesel consumers watching or reading about the price of oil is probably expecting a bigger decline in the price of the fuel at the pump than what will develop with current trends.

That ballooning spread is reacting to a variety of factors, including the general loss of refining capacity in the Middle East from attacks by Iran on facilities in other countries.

But more recently, two other developments are adding further tightness to the diesel market.

• Drone attacks by Ukraine on Russian refineries, according to Energy Aspects, earlier this month had pushed Russian refinery operations to their lowest processing level in more than 20 years. EA, according to a report by Bloomberg, processed 3.91 million b/d of crude in the first part of July, down 1.4 million b/d from its levels of a year ago. Given the physical properties of Russian crude, that country’s refineries are major producers of diesel. As a result, the country has banned diesel exports.

• Water levels on the Rhine River, after a scorching hot summer in Europe, are falling to a level that will impact deliveries. There are projections that levels will soon fall to their lowest level since 1990. That will both inhibit fuel shipments as well as make them more expensive to move on restricted barge usage.

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