Even as the weekly Department of Energy/Energy Information Administration weekly retail diesel price rose for the 14th consecutive week Monday, the numbers on diesel prices in all markets continue to scream higher and do not show signs of reaching a peak in the immediate future.
A new factor is driving the market: the cold weather that has moved into much of the nation.
Matthew Kohlman, an associate editorial director at S&P Global Platts, whose staff watches the market for products like gasoline and diesel, said prices for diesel are clearly starting to be impacted by the cold weather. Heating oil, like diesel, is a middle distillate and as more distillate molecules are needed for the heating oil market, they can start to squeeze diesel markets.
“We were supposed to get a mild winter, but lately the markets have been really feeling a full-on cold spell,” Kohlman said. “That’s really taken the diesel prices higher because a lot of that goes into the heating oil pool.”
Kohlman said the benchmark Platts U.S. Gulf Coast spot price for ultra low sulfur diesel on Tuesday stood just under $1.70/gallon, at $1.6965/g. On Feb. 10, 2020, as the pandemic was on its way to decimating the price of diesel and other oil prices, that benchmark was $1.5350/g. At the end of January, just less than two weeks ago, it was $1.534/g.
In California, the spot price of ULSD that is compliant with regulations from CARB, the state regulatory agency, was $1.7803/g Monday, according to Platts. At the start of the year, it was $1.49/g.
Those numbers may seem distant to a driver or fleet filling its tanks, as they are some of the starting points for what becomes a wholesale and retail price. But further down the supply chain, in wholesale and diesel markets, price increases have been significant just since the last business day of January.
According to data in the SONAR DTS (retail diesel) and ULSDR (wholesale diesel) price series, retail prices are up double digits in several key markets since Jan. 28 but have not kept up with increases in wholesale prices. For example, the retail diesel price in Chicago, according to the DTS data feed, rose to $3.01/g Monday, from $2.865/g, a gain of 14.5 cents. But the wholesale price for Chicago found in the ULSDR feed — which goes an additional day, through the posting of Wednesday — shows an increase to $1.812/g from $1.644/g, a jump of 16.8 cents.
Meanwhile, in Atlanta, the retail price has risen to $2.839/g from $2.755/g on Jan. 28, a relatively modest increase. But the wholesale numbers are up by far more, to $1.782/g on Wednesday from $1.639/g.
On commodity markets, diesel is starting to move up faster than the increase in crude. Since diesel is a global market, with prices in the U.S. impacted by all sorts of international factors including imports and exports out of the country, the comparison that needs to be made is not to West Texas Intermediate, the U.S. crude benchmark. Rather, it is to Brent, the international crude benchmark.
The basic spread of front-month Brent and front-month ULSD on the CME exchange, normalized to cents per gallon, shows that the spread has moved up slightly since the end of January, rising to 30.58 cts/g Monday after being at 27.95 cts/g on Jan. 28. But that number was as low as 23.58 cts/g early in January, which suggests anywhere from 5 cents to 7 cents of the increase in wholesale and retail diesel prices may be coming from the fuel strengthening relative to crude rather than just being pulled up by the increase in benchmark Brent.
The benchmark WTI price is important for the trucking industry in that all the oil patch customers being served by truckers are mostly getting WTI-linked prices for their crude. WTI on Monday settled at $57.97/barrel, which is now firmly above the $53-$54 levels seen in the third week of January last year, when oil prices were starting to react to the virus reports coming out of China. That is a sharp move from the $52.34/settlement on Jan. 28.
Ed Morse, the legendary head of oil research at Citi, said on a CNBC interview Monday that while there has been some response in the oil patch to higher prices, with rig counts rising, it won’t be enough to have any significant impact on U.S. production in 2021. Shale oil production can come back on relatively quickly, far quicker than conventional wells. Morse said that “there will be a shale response the longer we see higher prices, but that is not a 2021 story.” But even with the increase in rigs this year, Morse said, “there is almost no way for oil production this year to get higher than last year.”
U.S. crude production in 2019 averaged 12.24 million barrels/day, according to the EIA. Between May, the first month last year that production registered a significant decline from the pandemic, and November, the most recent month for which there is full monthly data, U.S. crude production averaged 10.63 million b/d. The most recent weekly estimate, which is considered less accurate than the monthly numbers that are on a two-month delay, has U.S. production at approximately 10.9 million b/d.