Benchmark diesel price rises again as futures and crude diverge
Key Takeaways
- •The DOE/EIA weekly retail diesel benchmark increased to $5.313 per gallon, up 17.9 cents from the prior week and the third consecutive weekly gain.
- •Brent crude fell $8.42 per barrel on Monday to $88.36, while ULSD futures declined only 6.9 cents per gallon to $4.1116.
- •The gap between Brent and ULSD widened to what appears to be an unprecedented level, with the spread exceeding $2 per gallon when converted on a like-for-like basis.
- •The article links the tighter diesel market to reduced refining capacity in the Middle East, lower Russian refinery processing after drone attacks, and falling Rhine River water levels that could hinder fuel transport.
Oil prices are falling sharply again, but the benchmark used for most fuel surcharges rose for a third straight week.
The Department of Energy/Energy Information Administration average weekly retail diesel price increased 17.9 cents per gallon to $5.313 per gallon, effective Monday and published Tuesday. It marked the third consecutive weekly increase, adding 73.5 cents per gallon over that period.
Even after the recent moves, the latest DOE/EIA figure is the highest since June 8, when it stood at $5.21 per gallon. It is still just below the April 27 level of $5.351 per gallon, but since then the price has posted double-digit gains or losses in eight of the last 13 weeks.
Because retail fuel prices lag futures markets, the weekly diesel benchmark was not expected to reflect the steep decline in futures that began when trading opened Sunday evening U.S. time. That pullback followed lower prices on Friday, which were widely viewed not as a reversal, but as a pause after several days of sharp gains.
Possible peace?
The end over the weekend of what had been nightly U.S. attacks on Iran, along with other signs of negotiations, pushed futures prices higher in the first two days of this week.
For diesel consumers, however, the more important development is that diesel prices once again have not tracked the fall in crude. That matters because diesel is closely tied to freight costs, industrial activity and supply-chain pricing, so the gap between crude and diesel can show stress in refining and distribution even when crude itself is sliding.
On Monday, Brent, the global crude benchmark, dropped $8.42 per barrel to settle at $88.36 per barrel. Brent had settled above $100 just two days earlier, a decline of 8.7%.
At the same time, ultra low sulfur diesel (ULSD) on the CME commodity exchange fell 6.9 cents per gallon to settle at $4.1116 per gallon. That was a decline of only 1.65%, far smaller than Brent’s drop.
Spread like no other
That gap produced what appears to be a historic reading: if Brent were converted to cents per gallon and subtracted from the ULSD price, the difference would be more than $2 per gallon. There is no recent record of that ever happening.
The comparison is not perfect. Front-month Brent is for September barrels, while front-month ULSD is for August, so the crude cannot simply be turned into diesel for delivery next month. Even so, the relationship highlights how far apart the two markets have moved.
On the last trading day before the U.S. and Israel launched attacks on Iran, the spread was about 87 cents per gallon.
At about 11:30 a.m. Tuesday, the gap had widened further. Brent was down about 9.7%, while ULSD was down about 0.2%.
For diesel consumers, the widening spread suggests that a sharp drop in crude does not necessarily translate into an equally large decline at the pump.
The expanding difference is tied to several factors, including the broader loss of refining capacity in the Middle East after attacks by Iran on facilities in other countries.
More recently, two additional developments have tightened the diesel market.
Drone attacks by Ukraine on Russian refineries, according to Energy Aspects, pushed Russian refinery operations earlier this month to their lowest processing level in more than 20 years. EA, according to a Bloomberg report, processed 3.91 million barrels per day of crude in the first part of July, down 1.4 million barrels per day from the same period a year earlier. Because of the physical properties of Russian crude, Russian refineries are major diesel producers, and the country has banned diesel exports.
Separately, water levels on the Rhine River are falling after a scorching summer in Europe. Projections show levels could soon reach their lowest point since 1990. Lower water levels would restrict barge usage, making fuel shipments harder to move and more expensive to transport.
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