HOUSTON — As Jennifer Granholm stood in front of an audience of energy industry leaders at a conference that attracted about 6,000 attendees, she urged the nation’s oil executives to increase production.
And as the secretary of energy was speaking, settlement prices for the day’s trading on the CME commodity exchange were posted, with oil markets plunging by historic levels — none more so than ultra low sulfur diesel.
The ULSD contract dropped a staggering 97.3 cents a gallon, settling at $3.4643 a gallon. The ULSD market settled March 2 at $3.4947, after the first big war-fueled surge, and then continued to rise for the next several days. With Wednesday’s decline, it now has given back all those gains.
Notably, the percentage decline of 21.9% was not even close to the biggest one-day percentage drop in the history of the ULSD contract, which began life as a heating oil contract before transitioning over time to more of a diesel trading instrument.
On Jan. 17, 1991, the day after the first Gulf War began and the dominance of the U.S. was established on the battlefield, the heating oil contract fell by almost a third. But on an outright basis, that day’s drop was a decline of slightly under 30 cents a gallon.
The decline in diesel Wednesday far outstripped the drops recorded in benchmark crude markets. West Texas Intermediate was down 12.56%, and Brent was down 10.2%.
Granholm’s comments came in front of a lunch audience at the giant CERAWeek meeting in Houston. CERAWeek is now produced by S&P Global Commodity Insights.
It came on what might be viewed as the first day of significant price relief in an oil market that has exploded in the past week. “We are on war footing and we have to respond,” she said. “We have to increase short-term supply.” Granholm made reference to the 60 million barrels that several nations, under the auspices of the International Energy Agency, are releasing into the market from strategic stocks.
But it was investors who were the target of some of Granholm’s most pointed comments. A common theme around U.S. oil exploration today is that if anything is holding it back, it’s the desire of investors and the decisions of management teams to not recklessly chase more production by loading up with more debt, in a replay of the industry’s business model of just a few years ago. Production was higher then, but free cash flow and dividends were non-existent. That has changed.
“The message right now, and I hope investors are listening, is that we can’t have one element holding back when you see what is happening every night,” Granholm said. “At this moment, we all have to give.”
Granholm took on social media buzz that has charged the Biden administration with lowering U.S. oil production. As she noted, production has risen during President Joe Biden’s term, natural gas production is at a record and liquefied natural gas exports in January also were at a record. Granholm repeated the standard forecast that current U.S. production of 11.6 million barrels a day will be up by 800,000 to 900,000 barrels per day by the end of the year.
However, the weekly EIA report showed U.S. crude production at 11.6 million barrels a day for the fifth consecutive week.
While urging producers to pull more oil out of the ground, Granholm said, “I hope some of your investors are saying to you right now at this moment of crisis that we need more supply.” But she also conceded that many producers “are grappling with supply chain issues.”
The diesel market’s decline at a rate faster than crude made sense only given that it had risen the most in recent days. The spread between Brent and diesel had blown out to almost $1.40 a gallon Tuesday, an unheard-of amount, before falling back Wednesday to 81.81 cents.
But the big drop in diesel prices Wednesday, faster than crude, occurred even as the data on diesel in the week’s Energy Information Administration report was bullish.
Days’ cover of all nonjet inventories declined to 25.9. That figure is produced by taking inventories of all distillates that aren’t jet, a grouping that is mostly diesel, and dividing average daily consumption into it. It came in under 26 days for the first time since 2008. Coincidentally, or maybe understandably, that was the year the previous all-time-high price for crude and diesel was set before new records were established in recent days.
Demand for distillates was strong, coming in at the highest level in five weeks.
Granholm said the events in the oil market in recent days have had one benefit: Many people who didn’t know it before now understand that oil is a global market. “Even though we’re producing at record rates, we’re still facing these incredible gas prices, and I think people are starting to connect the dots,” she said.