New DOE methodology yields small change in weekly benchmark diesel price

The increase of 1.5 cents per gallon came after the futures price of ultra low sulfur diesel on the CME commodity exchange climbed more than 8.4 cents a gallon between Friday, June 3, and last Friday. 

It also comes after a week in which the DTS.USA data series in SONAR showed a much higher level of increases. 

But more interesting was what happened in futures markets Monday, when the sky-high spread between crude and petroleum prices sharply reversed course, raising the question of whether the ultra-bull market in gasoline and diesel may have hit a peak for now.

Ultra low sulfur diesel on the CME Monday declined 8.33 cents per gallon, a drop of 1.91%, even as benchmark domestic West Texas Intermediate crude rose 0.22% and international crude benchmark Brent increased by about the same percentage. It’s the second consecutive trading day on which ULSD was weaker than crude. 

A similar phenomenon occurred in the market for RBOB gasoline, an unfinished gasoline product that serves as the proxy contract for gasoline on the CME. 

A basic measure of refining profitability is the 3:2:1 spread, which measures the value of three barrels of crude to a combination of two barrels of gasoline and one barrel of diesel. It has been in the $55- to $60-per-barrel range recently, a number that is almost three times what it was at the beginning of the year.

But all signs point to refineries around the world operating at levels that will push their output to the maximum, suggesting that refining margins — which in the real world are far more complex than the 3:2:1 — are likely to drop. 

Discussion on the #oott hashtag on Twitter — which tracks oil markets — said at least one closely watched analyst sees refining throughput rising 5 million barrels a day globally through August. U.S. refining operations in the week ended June 3 rose to 94.2% of capacity, according to the most recent weekly EIA report, which is within the normal range of where it generally sits in early June. But it was the highest level since August 2019. 

That does not mean the outright prices of diesel and gasoline will come down considerably, though the more than 8-cent decline Monday is certainly a step in that direction. But refining margins can narrow by products holding steady and crude rising. That argument — that crude is underpriced at current levels near $120 because of the value of products — has been prevalent in markets of late.

However, it ignores the fact that strong demand for petroleum products and the restrained market for crude, due to lower output from Russia, is bumping up against refinery capacity that has not significantly grown in the past two years, in part due to projects being sidelined by the pandemic, and has outright declined in the U.S.

Crude markets also got a boost Monday from conflicting reports of the level of Libyan output. There were reports that Libyan output had declined to zero on the back of ongoing political battles in the country. While that was uncertain, it clearly is falling toward that level. 

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