Benchmark diesel price declines, East Coast squeeze may be getting worse

In the continuing crazy market known as diesel, here’s the odd development for Monday: The benchmark diesel price dropped last week. 

It wasn’t by much — just 1 cent, to come in at $5.613 a gallon for the Department of Energy/Energy Information Administration weekly report. It’s the first weekly decline in five weeks. Of the 20 weeks when a price has been posted in 2020, it is one of just five weeks during which the benchmark number for fuel surcharges dropped. (And one of those weeks was Jan. 2, which mostly reflected price activity at the pump in the final week of 2021.)

The decline in the price is shocking only in the context of a market where high prices are on everybody’s mind. But the price of ultra low sulfur diesel on the CME commodity exchange has declined slightly over the past six trading days. It settled at $3.9543 a gallon on May 6. On Monday, it settled at $3.9075 a gallon, a small but notable decline.

But the DOE/EIA figure also publishes regional price averages, and that’s where the biggest issue in the diesel market — the East Coast — becomes more visible.

The spread between the East Coast price and the national average, which was just 5 cents a few weeks ago, continued to widen. With the East Coast DOE/EIA price up 3.7 cents a gallon to $5.944 and the 1-cent decline in the national price, the gap between the two widened to 33.1 cents a gallon. The spread averaged just under 3 cents for 2019, the last full pre-pandemic year.

The tight squeeze in East Coast supplies showed few signs of easing. In the physical markets where traders move pipeline or barge quantities of diesel, the spread between Gulf Coast and East Coast diesel blew out to 76 cents a gallon. In the first few days of last week, it had traded between 55 and 65 cents a gallon before narrowing to about 35 cents a gallon, according to data provided by General Index. That stirred some belief that the East Coast squeeze might be nearing a peak.

But that physical Gulf Coast to East Coast spread, which in normal times might be just a few cents, blew out to 69.5 cents a gallon Friday. On Monday, it widened further, coming in at 76 cents a gallon, according to General Index.

The other significant and somewhat unexpected development in the diesel market is that while prices of the fuel had outpaced crude and gasoline for several weeks, that is no longer the case.

Monday’s trade was an example. The ultra low sulfur diesel price on CME declined 1.37 cents, to $3.9075 a gallon. It is now less than where it was May 6, when it closed out that week at $3.9322 a gallon, for a decline of about 0.6%.

But crude has soared during those six trading days, rising almost 10.8% for West Texas Intermediate and 7% for RBOB gasoline, including two days where it rose more than 4%. The settlement Monday at $4.0229 a gallon is the highest ever for that product on the CME commodity exchange. By contrast, diesel is about $1.20 less than its all-time high. 

Diesel’s failure to rise with the rest of the market Monday was unusual given that the reasons for the increases in crude and gasoline were mostly attributed to a possible end to lockdowns in Shanghai, China’s largest city. Lockdowns in other parts of the country remain in place, but an easing of restrictions for Shanghai is seen as a more important possible development.

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