Diesel futures show signs of fierce market squeeze, driving prices higher

While the Department of Energy’s Energy Information Administration popped out its weekly benchmark diesel price Monday that showed an increase of 5.9 cents from the prior week, the real action is in the futures market, where a huge squeeze appears to be developing.

The latest DOE/EIA price came in at $5.16. It is the third-highest price in the history of the series, falling only behind the $5.185 of March 28 and the $5.25 two weeks before that.

But on a day when crude benchmarks fell either side of 4% — 3.53% for West Texas Intermediate and 4.06% for Brent — the price of ultra low sulfur diesel on the CME commodity exchange soared 3.87%, a gain of 15.23 cents a gallon to a $4.0909-per-gallon settlement.

The ULSD increase combined with the decline in crude prices sent the spread between Brent and ULSD to unheard-of levels. Comparing the front month price of both contracts yields a spread of about $69.50 a barrel. On Friday, the spread was $58.77. A year ago, it was about $13.25 per barrel.

The May ULSD contract expires Friday. The enormous increase in the price of ULSD, the ninth-biggest one-day move in the recent round of volatility, suggests that some traders who have been betting on the price of diesel falling are looking at the Friday settlement, when they need to either close out their position on paper or deliver diesel to a buyer, and are finding few barrels of diesel on offer. As a result, they found themselves bidding higher numbers throughout the day: The settlement was only about 4.5 cents a gallon less than the highest traded price of the day but was well above the lowest price at $3.817.

That there is a squeeze going on in diesel is evidenced not only in its upward movement while crude was coming down, but by what happened in future months. The increase of more than 15 cents for the May contract contrasts sharply with the 1.83-cent increase for June barrels, and with the fact that every other settlement price going out into the future was negative on the day. That suggests the broader market was trading on the same weakness as the crude market, except for the front month where the squeeze is developing.

While the movements may seem like a game among traders that has little to do with the real-world price at the pump, the reality is that wholesale prices will move in a rough correlation to the front-month futures price. What retailers are paying to resupply their tanks and sell their product to consumers like truck drivers will almost assuredly be moving up in postings for Tuesday, though refiners and suppliers are smart enough to know that the front month, caught in a squeeze, does not necessarily reflect the broader diesel market. Correlations will be watched closely by marketers.

One thing about squeezes: They can end quickly. Once the short positions have been covered and bidding for the barrels that are in the market eases up as a result, the price can come down fast. Crude fell Monday on fears of a global oil demand slowdown as the COVID-related lockdown in Shanghai continues alongside signs that lockdowns may spread to Beijing.

The increase in the DOE price came during a week in which diesel futures were highly volatile but ultimately ended up more than 8 cents per gallon. However, recent increases in retail prices have not been as rapid as changes in wholesale prices, and the spread between retail and wholesale prices, reflected in the SONAR.USA data series, has been slightly less than normal in the past week.

Over time, the spread is often near $1 to $1.05, but it has been less than $1 for several days as retailers have been slow to react to highly volatile wholesale prices, which in turn are being driven by the wild futures market.