The weekly average retail diesel price published by the Department of Energy/Energy Information administration fell 4.1 cents a gallon Monday, alongside a more than 12-cent increase in the futures price of diesel.
The decline, to $5.144 per gallon, is the second in the past three weeks. But the past three weeks comes after a 10-week run of increases, which took the benchmark price for fuel surcharges up to $5.25 on March 14, before the recent declines have taken slightly more than 10 cents off the price.
But if diesel buyers and shippers exposed to the price through surcharges are breathing a sigh of relief, they may want to think again. The price of ultra low sulfur diesel (ULSD) on the CME commodity exchange surged Monday, increasing 12.21 cents a gallon to settle at $3.5461.
Looking at data on the front month price of ULSD over the past few days might suggest that the price overall is declining. But while the settlement price Monday might be about 24 cents per gallon less than where it settled a week ago, the appearance of a decline masks the fact that much of the “drop” occurred because the April contract rolled off the board after trading Thursday, the final day of the month, to be replaced by the May contract as the front month.
When physical markets are tight, prices move into a relationship known as backwardation, with each month’s price less than that of the prior month. So the April price was the highest in the data series, with May less than that and so on.
Rolling from April to May gives the appearance of the front-month price declining. But when the May contract is compared to where it was a week ago, when it was the second month, the strength of the market is revealed: The settlement Monday of $3.5461 is almost 37 cents more than it was a week ago.
One of the factors driving the diesel market higher is what is happening with jet fuel.
Jet fuel is a distillate, like diesel. Strong prices for one or the other will incentivize refiners to do two things: make more distillate products in general and shift that distillate production toward the more profitable distillate. With jet fuel at record-breaking numbers, that is not good news for diesel buyers.
In the jet fuel market, S&P Global Commodity Insights, which includes the legacy Platts business, assessed New York jet fuel Friday at the CME ULSD price plus $3.01 per gallon. That worked out to approximately $6.35 a gallon. S&P Global Commodity Insights said it was likely the highest per-gallon price it had ever assessed for any product in its history.
But it didn’t stop there. Platts reported Monday that there were deals that morning at ULSD plus $3.75 a gallon, and Twitter buzz said prices ultimately crossed the level of $7.50 a gallon.
“Market participants do not attribute this exponential leap in … jet fuel’s value to a single, consequential event confined within the parameters of the Atlantic Coast jet fuel market,” SPGCI wrote on its website. “Rather, it is regarded as only the most recent development in a sequence of events beginning with the conflict between Russia and Ukraine.”
The increase in prices is probably coming as a shock to people who heard last week of the Biden administration’s plan to release into the market 1 million barrels of oil per day from the Strategic Petroleum Reserve for six months. That is by far the largest release of SPR oil in its history.
Other member countries of the International Energy Agency are expected to announce their own plans for further strategic stock releases sometime this week.
And while the outright price has now rebounded to recapture about half of the decline that has occurred since last Wednesday, the day before the release was announced, there was another sign the market is anticipating lower prices: the narrowing of the crude backwardation.
Last Wednesday, the 12-month spread in the market for Brent crude, the global benchmark, was $20.77 a barrel. That reflected the difference in the price for May 2022 barrels and May 2023 barrels. This is an enormous number; the 12-month spread averaged $5.45 a barrel for all of 2021.
But by Monday, the 12-month spread had narrowed to $12.77 a barrel and was just under $12 on Friday, a sign that the market believes the inventory squeeze will be eased somewhat by the strategic stocks.
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