After dropping for 8 weeks, benchmark diesel price turns higher

Tuesday marked the end of the eight-week decline in the benchmark diesel price used for most fuel surcharges. The Department of Energy/Energy Information Administration price posted a 2-cents-per-gallon increase.

The upward move to $3.914 a gallon marked the first increase since a big 10.1-cent jump to $4.545 a gallon on Oct. 23. Since that date and through the price published Dec. 21, the average retail diesel price published by the DOE/EIA had fallen  65.1 cents a gallon before the 2-cent upward move Tuesday.

There has been a significant shift in oil market sentiment in recent trading, particularly the past several days, which is visible in the latest increase in the DOE/EIA price.

Given that much of the shift has occurred because of geopolitics that might spill over into supply worries, and possibly has been driven by short covering in the crude market that has not been as evident in product markets, crude has been the strongest performer in recent weeks as bearish sentiment faded and the bulls took over.

Brent on the CME commodity exchange hit a recent settlement low of $73.24 a barrel on Dec. 12. It had not settled above $80 a barrel since Nov. 30.

After that Dec. 12 nadir, Brent rose nine of the next 12 trading days, breaking past the $80-per-barrel settlement level Tuesday by rising $2.53, to $81.07, an increase of $7.83 a barrel or 10.7%.

The movement in ultra low sulfur diesel (ULSD) on the CME took it to a settlement Tuesday at $2.6688 a gallon, up from its Dec. 12 low settlement of $2.5074 a gallon, a day that saw it plummet more than 10 cents. The Tuesday settlement of $2.6688 equated to an increase of 6.4% during that time, with crude far outpacing diesel.

The 3-2-1 spread, a simple measurement of refinery profitability derived by using the price of three barrels of crude and subtracting that from two barrels of RBOB gasoline and one barrel of ULSD, has fallen on a Brent basis to $16.73 a barrel Tuesday from $20.43 a week ago, showing how the recent market surge has been led by crude markets with product markets following.

That sort of movement, with crude leading the way and products following, is often seen when geopolitical incidents and fear of a potential disruption to supply manifests itself in markets. Rerouting of ships away from the Red Sea and the Suez Canal around South Africa’s Cape of Good Hope to avoid attacks by Houthi rebels in Yemen does not reduce supply as measured in actual barrels. But the addition of steaming time of anywhere from seven to 12 days does tie up supply on the water longer, which effectively acts to tighten supply.

“Despite container giant A.P. Moller-Maersk A/S stating Sunday that it’s preparing to resume using the Red Sea under the protection of the new multinational maritime task force, many other shippers continue to shun the route through the Suez Canal in favor of safer but longer voyages, delaying the delivery of oil cargoes,” Bloomberg reported.

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