A relatively small upward move in the weekly Department of Energy/Energy Information Administration (DOE/EIA) retail diesel price has pushed the benchmark number up to almost a four-year record.
At $3.385 a gallon, the price that is the basis for most fuel surcharges is now at a level that has not been seen since the price published Oct. 15, 2018. It was $3.394 a gallon on that date.
This week’s price marks a 1.3-cent increase from the prior week.
And in a continuation of a strange Monday trend, in which the price of the DOE/EIA price seems to move in the opposite direction from large gains or declines in the CME commodity price of ultra low sulfur diesel (ULSD), the upward move in the DOE/EIA price came as ULSD was falling hard.
There is no link between the two; the retail prices surveyed by the DOE every Monday would not be impacted by movements in the commodity market on that day. But it has been a strange quirk of recent markets.
ULSD on the CME declined by 4.9 cents a gallon Monday, a drop of 2.22%, to $2.1601, on the same day as the DOE/EIA increase.
ULSD dropped with just about the entire cross-section of financial assets, pushed down by the decline in equities that in turn was fueled by debt concerns out of China. West Texas Intermediate crude oil on CME was down $1.68 a barrel Monday to a settlement of $70.29, a decline of 2.31%.
But at $2.1601, the price of ULSD on CME is still almost 5 cents higher than it was as recently as Sept. 9, even after Monday’s decline.
One number that should concern diesel consumers is the size of the backwardation in the current market. Backwardation is a description of a market structure in which the front-month price for a commodity, like diesel, is higher than the prices as the market moves out on the trading calendar. The inverse of backwardation is contango; a market in perfect balance is in contango. The higher prices out the calendar represent the cost of storage and financing.
But when inventories are tight, markets fall into backwardation. Because of lean inventories, the barrel that is closest to the present becomes the most valuable barrel on the market. Product further out on the calendar is worth less, and a backwardation develops.
On Friday, the 12-month backwardation was 10.38 cents, with the October 2022 price that much less than the corresponding month for 2021. It came in slightly Monday, to 10.11 cents. But regardless, this is the widest backwardation in several years — data is not complete — and comes after the market was in contango every day from late January 2020 to February 2021.
Last week’s inventory numbers from the EIA tell the story of why the market may be signaling tightness. Outright U.S. inventories of ULSD were 120 million barrels, which is significantly less than the five-year average of 136.7 million barrels for the second week of September.
Inventories measured as days of consumption was 33 days, which is well under the five-year average of 38.8 days of cover for that time period.
Diesel also faces another issue: It’s getting cheap relative to natural gas.
That commodity has risen to $5 per thousand cubic feet from $4 per mcf just a month ago. The surge in European prices has been even more dramatic. When that happens, the use of distillates as a heating fuel, or even a fuel to generate electricity, becomes more attractive. The long-term weakness in the natural gas market for several years had left it as the preferred commodity to heat homes and business or generate electricity.
But the surge in gas prices is now calling that into question, and if distillate molecules start getting pulled into the heating or generating market, that’s bad news for diesel customers.