Retail diesel prices as measured by the Department of Energy/Energy Information Administration weekly average are starting to react to an overall bullish market in crude oil and petroleum products.
The weekly number, the benchmark used in most fuel surcharges, rose 6.5 cents a gallon Monday to $4.061 a gallon. It’s the largest one-week increase since a big 21-cent increase on Feb. 12.
But even after that rise two months ago, the price stood at $4.109 a gallon. With Monday’s increase, the benchmark still is less than that.
Sentiment and news developments in oil markets have been decidedly bullish in the past week. That sort of market push generally is seen most prominently in the market for Brent or West Texas Intermediate crude. Brent, the world benchmark, settled Monday at $90.38 a barrel, down 87 cents on the day but almost $5 higher than a recent low of $85.43 per barrel on March 22.
And though Brent, WTI and petroleum products declined Monday, it came on a day when the headlines all pointed to higher levels. One prominent headline an article in Bloomberg summed up that view. The news agency’s take: “The odds of $100 oil are rising as supply shocks convulse the market.”
Oil prices are moving higher in part on tension in the Middle East, though there is no evidence that any production has been cut as a result of that uncertainty. But the drumbeat of potential conflict involving Iran, Israel and possibly the U.S. is helping to light a fire under the market price.
Ultra low sulfur diesel (ULSD) has mostly failed to keep pace with the increase in crude prices on the CME commodity exchange. The spread between diesel and Brent on March 18 was almost 72 cents per gallon. On Monday, in CME trading, it was down to 58.3 cents, a key reason why retail prices are not climbing at the same rate as crude numbers.
That fact, combined with stability in physical market trading for diesel in key hubs such as the Gulf Coast, has helped insulate diesel slightly from the vagaries of the more bullish market, a reason why diesel has trailed Brent.
In the physical market, pipeline or barge quantities of diesel are traded as a differential to the CME ultra low sulfur diesel prices. In all the key markets — New York Harbor, Chicago and the U.S. Gulf Coast, for example — that spread has moved little in the past few weeks. If those spreads had been stronger, it might have resulted in retail diesel prices increasing at the same rate of increase as crude. But there’s been no extra lift from the physical market differentials, so any increase in retail diesel prices all have come from movements in the ULSD contract on CME. And in that market, since Feb. 12 — the most recent high-water market for the DOE/EIA price — Brent is up 10.2% but ULSD is down almost 20 cents a gallon.
Among the smorgasbord of developments that all pointed to higher levels were these unrelated news headlines:
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In its article about $100 oil, Bloomberg reported that crude shipments out of Mexico were down 35% to their lowest level since 2019. That does not mean that the country produced less oil. Instead, it is trying to divert as much of its crude as it can to domestic Mexican refineries and substitute home-refined products like gasoline and diesel for crude exports. Theoretically, that activity should have a neutral impact on oil prices, but for now, physical market prices for crudes that compete with Mexican grades are showing the effect. According to Bloomberg, Mars crude, produced in the U.S. Gulf of Mexico and similar to some key Mexican grades, is at a “multi-year premium over WTI,” though it “usually trades at a discount to WTI.”
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JP Morgan, according to reports, said its analysis of pipeline data suggests that U.S. crude production in the Lower 48 states has fallen recently to about 12.32 million barrels a day from 12.71 million a week earlier. The report did note that output among the Lower 48 over time has generally been less than in March. But it is U.S. production that has done the most to offset the continuing cuts by the OPEC+ members.
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The British Defense Ministry reported that Ukraine struck Russian refineries five times in March. Its total, according to the ministry, is 10 strikes during the war through drone attacks. The attacks have taken about 10% of Russian refining capacity off the market, according to the report.
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At the Financial Times Commodities Global Summit in Switzerland, Sebastian Barrack, the head of commodities at the Citadel hedge fund, said oil markets are likely to be “extremely tight” in the second half of 2024, according to several news reports. The discipline shown by OPEC+ in sticking to its biggest cuts shows that the group has “definitely regained control” over oil markets.
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