Another benchmark diesel price drop, but decline may be sputtering

Diesel prices in the wholesale and futures markets have trended higher over the past several trading days, but retail prices are still stuck in the past. And that’s to be expected.

For the fifth consecutive week, the benchmark Department of Energy/Energy Information Administration average national retail price declined, this time by 1.2 cents per gallon to $4.282. It’s also the 14th drop in the last 17 weeks, a decline that has taken the data point used for most fuel surcharges down $1.053 a gallon from the $5.333 recorded Nov. 7, the last time the DOE/EIA price rose.

The decline in the DOE/EIA price comes as futures and wholesale prices — the latter tracks the direction for the former fairly closely — had been mostly flat before an upturn last week. Ultra low sulfur diesel on the CME commodity exchange settled Feb. 17 at $2.7121 per gallon, a recent low, before moving back over $2.90 Friday. The ULSD price settled Monday slightly lower at $2.8866 a gallon.

The gap between retail diesel and wholesale prices, as measured in the FUELS.USA data series in FreightWaves SONAR, has been dropping for several weeks. Given the upward move in wholesale prices the past two weeks, it leads to the conclusion that retail prices are headed back toward a more normal relationship with wholesale prices and this movement is tied more to what happened in the past rather than what’s happening now. The spread stood at $1.618 per gallon on Feb. 18. It was $1.322 a gallon Monday, dropping almost 30 cents  

But the average wholesale diesel price during that time as reflected in the ULSDR.USA data series in SONAR rose to $3.105 per gallon from $2.937 on Feb. 18, moving upward even as retail prices have dropped.

The FUELS.USA spread is moving toward a more normal level that tends to average out in a range of $1 to $1.10 per gallon. But outside of a brief period in early January, the spread has not been in that historical range since November. 

Diesel received its biggest recent jolt at the start of February when the European Union implemented its latest round of restrictions on Russian diesel exports. It banned Russian waterborne sales into any EU member country. It also put a $100 per barrel cap on the price of diesel for any shipments involving a tanker insured by a company in the EU or flying its flag. 

At the enormous CERAWeek by S&P Global conference in Houston on Monday, Chevron CEO Mike Wirth kicked off the 7,500-person event by noting that a true test of the impact of those EU restrictions has not yet occurred.

Wirth said the restrictions, aimed at keeping Russia supplies on the market but pushing them into other countries at higher freight rates, introduced “new rigidities” into the oil products market. That market, according to Wirth, has always operated as “one big just-in-time system.” 

“There’s not a lot of swing capacity and not a lot of inventory capacity,” Wirth said. The supply chain for oil products is “normally optimized” but will now face constraints because of various restrictions tied to the EU actions.

That raises the potential impact of “an unexpected event,” Wirth said.

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