Benchmark diesel price declines again, nears April level

The six-week decline in the benchmark Department of Energy/Energy Information Administration weekly average retail diesel price now totals 67.2 cents/gallon.

The weekly price, which is the basis for most fuel surcharges, was down 13 cts/g this week, dropping to $5.138/g. It has not been at a level this low since April 18.

This week’s 13 cents decline isn’t even the largest in the six-week drop: it’s just the third biggest. 

It also comes as futures and wholesale prices trended up last week. Retail prices had declined slowly as the futures price of ultra low sulfur diesel (ULSD) on the CME commodity exchange trended down from a June 16 high-water mark of $4.5719/g. But as seen in the FUELS.USA chart in SONAR, which measures the basic spread between average retail and wholesale prices, retail’s slow downward move sent the FUELS.USA margin out to all-time highs. 

But the front-month ULSD price on the CME last week rose about 17 cts/g as retail prices began to catch up to earlier declines.

Wholesale prices are likely to take a sharp downward turn in coming days on the back of two developments in the futures market.

The price of ULSD for September delivery, which is the first contract month listed by the CME commodity exchange, declined Monday by 10.9 cents/gallon to $3.44/g. 

Monday was the initial day that the September contract was the first month listed. Wholesale prices take their cues from many market factors, but futures prices are one of them. 

And while September may have been down 10.9 cents, the first month contract was down almost 18.5 cts/g, because the front month on Friday was for the August contract. The front month decline was a combination of two factors: the Monday decline and the fact that August went off the board at a higher level than September.  

The market isa in a structure known as backwardation, meaning the price of diesel declines into the future. For example, Monday’s settlement of $3.44/g for September concurrently had a settlement for October barrels of $3.3909/g.

Even as the price of diesel continues to decline, there were warnings last week on a quarterly earnings call from Phillips 66 that the market for all distillates, including diesel, remains tight.

Brian Mandell, Phillips executive vice president for marketing and commercial, said the refining giant expects to continue to benefit from strong margins in the diesel market, even as the spread between Brent crude and ULSD on CME is down to a range of 50 to 60 cts/gallon after being as high as $1.40 at the start of June. 

With heating oil demand a key component of the distillate market, Mandell said it was “hard to see a (solution) for distillate coming up in the winter.”

“We’re at low inventories,” Mandell said, according to a transcript of the call supplied by SeekingAlpha. “If you look in the U.S., we’re at minus 20% versus 2015 to 2019 averages. We’re heading into a  turnaround (maintenance) season. Demand is strong. We’ve seen demand better than 2019 currently. “

Mandell added that refiners are processing as much diesel as they can. But another factor in the market is demand from the agricultural sector, and “we’re heading into harvest season.” 

European refiners face higher energy costs to run their facilities, and operations there are “expensive versus the U.S.,” Mandell said. “So they’re not going to be able to help much. “

The loss of Russian distillate supplies is about 150,000 b/d, he added. 

Quarterly earnings for Truckstops of America (NASDAQ: TA), released Monday afternoon, revealed how profitable selling diesel was not just for that company but by extension, for other fuel retailers. As one of the nation’s biggest sellers of diesel, its margins are seen as in line with what other sellers would also be recording. 

TA reports a total fuel margin, but given that gasoline sales only represent about 11% of TA’s total volume, the margin figure is overwhelmingly a diesel number.

That margin, 27.3 cents/g, was well above anything seen recently. In the first quarter, it was 20.3 cts/g. A year ago, in 2021’s second quarter, it was 17.2 cts/g. And in the first quarter of 2021, the margin posted by TA was 14.2 cts/g. 

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