The crude oil and diesel markets are entering 2021 on a bullish run, with the primary commodity exchange price of diesel just about where it was when the pandemic put the final dagger into prices in early March and with OPEC and its OPEC+ brethren shocking markets with a decision on further restraining output.
The price that matters most to truckers is the Department of Energy/Energy Information Administration weekly retail price, and that’s on a run too: nine consecutive weeks of gains, rising to $2.64 a gallon, up almost 27 cents since its low price of the year in early November. It’s also almost recovered to where it was in early March when prices accelerated their pandemic-fueled decline sharply, though prices had been drifting since the news of the coronavirus first hit markets.
As FreightWaves has noted the price of diesel will largely be determined by the price of crude. But beyond that, the difference in the price of crude and the price of diesel can fluctuate significantly, something that certainly happened in 2020.
That spread can be viewed as the “final mile” to get from crude to commodity diesel prices and then on to wholesale and retail prices. It opened 2020 at about 44.6 cents a gallon, when comparing the front month Brent price on CME to the front month price of ultra low sulfur diesel. Even during the deepest days of the pandemic, in March and April, it held above the 30-cents-a-gallon level. But it dropped below 10 cents by late May, before recovering to a still weak range of around 15 cents a gallon for much of the fall.
By the end of the year, it had risen to a 24-26 cents a gallon, still weak when compared to a full-year 2019 average of about 41 cents.
What it means from the perspective of drivers is that they have benefited overall from a lower price of crude during the year than the year before. And for most of the year, diesel lagged increases in the price of crude compared to normal levels. So consumers benefited on that front as well.
At this point, there aren’t too many people with significantly bearish views on the market. The international Brent crude benchmark dropped below $20 on a few occasions in early April; it’s now above $53 a barrel. The energy equity research team at Bank of America Merrill Lynch, in a report released Wednesday, doesn’t see a sharp move upward but sees current gains holding. “We believe oil markets are in the early stage of rebalancing enabled by sustained OPEC+ intervention led by Saudi Arabia as self-declared ‘guardian of the industry’ albeit with a fragile demand recovery,” the team said in its report. The team “at some point” expects to see Brent at $60.
All other prices, including diesel, generally start with movement in the price of Brent and the U.S. benchmark, West Texas Intermediate. But diesel has taken a wildly divergent course from crude in 2020.
But there are probably going to be enough 2020 factors that won’t be impacting the market this year that normalcy might be possible. Refiners won’t be shifting a large part of their operations to diesel because of a collapse in jet fuel and gasoline demand, like they did at the start of the pandemic. Inventories probably won’t be rising to historically high levels. Both of those things kept margins between diesel and crude at levels less than normal for most of the last seven to eight months of the year.
One question going forward for the price of diesel is whether there will continue to be refinery closures. Platts quoted a Morgan Stanley report that roughly 1.1 million barrels a day of U.S. refining capacity is getting “mothballed or permanently shut,” with an additional 350,000 “at risk for closure.”
But John Auers, a longtime refining analyst with the firm of Turner Mason & Co., questioned whether there would be further refining shutdowns. Auers said he does not see additional reductions in the offing and noted that ExxonMobil’s Beaumont, Texas, expansion of 250,000 barrels per day is coming online in the next year or two. He also said refinery margins are getting strong enough again that he even thinks a shut refinery like the Shell Convent, Louisiana, facility could come back online.
He did say he believed Europe is “due for more capacity rationalization,” picking up a trend that was in place several years ago before that was ultimately sidetracked.
A fairly bullish but steady report was issued by S&P Global Platts, quoting a report from its Analytics division. Platts reported that the division is forecasting the spot market diesel price on the U.S. Gulf Coast — one of the most important markets in the world — to fall in January to $1.322 a gallon from $1.374 a gallon in December, rising through the year to reach an average price of $1.519 a gallon by the fourth quarter.
But the prospect of oil prices falling in January took a significant hit in the first days of the month. The market moved higher when Saudi Arabia announced at the Monday-Tuesday virtual meeting of the OPEC+ group, which includes OPEC nations and key non-OPEC exporters, that it would cut its output by 1 million barrels a day in February and March, offsetting increases that other nations had planned under previously agreed-upon price increases.
That sent oil prices climbing Tuesday to levels of early March, both for crude and for diesel. The increase continued into Wednesday, with Brent crude settling at $54.30/b,, the highest number since February 25, and ultra low sulfur diesel on the CME commodity exchange settling at $1.5287/gallon, the biggest number since early March. .
As Auers said, the market for diesel is ultimately “a ride on the economy train.” Diesel has always been considered a better proxy for economic activity than gasoline, which as Auers noted is subject to “all sorts of other demographic factors,” like weather and seasonality. While diesel, as a distillate, also has seasonality issues — heating oil boosts winter demand — its correlation with economic activity is a tight one.
But the pandemic did bring in other extraneous factors, chief among them the collapse in jet fuel demand. Jet fuel is a distillate like diesel, and the virtual disappearance of jet demand and to a lesser degree gasoline demand at the start of the pandemic resulted in refiners choosing to make less of all products. But what they did make shifted heavily toward diesel. The trucks were still rolling to deliver the goods that America was still buying.
Eventually, that meant too much diesel was getting made and U.S inventories, measured in days of supply, rose to unprecedented levels. But as Auers noted, it may have taken awhile, but reifners were ultimately able to bring back into balance a more rational division among overall production levels from refineries as well as among the various products that are produced from those plants.
Auers said he is bullish on diesel demand in the U.S., believing vaccines are on the edge of bringing the pandemic to heel. “And that is going to lead to further strong economic recovery,” he said. As far as diesel demand, and even jet to some degree, “I do think there will be a bounceback.”