Benchmark diesel price down again as broader oil market continues decline

For the 20th time in the last 22 weeks, the benchmark price of diesel used for most fuel surcharges has declined. 

The Department of Energy/Energy Information Administration price released Monday was down 3.4 cents per gallon to $3.767. It’s the lowest price since Jan. 17, 2022. 

Since this series of downward price moves began after the DOE/EIA price of $4.622 per gallon on Jan. 30, the declines in all but two weeks have taken the price down 85.5 cents per gallon. 

Additionally, diesel consumers in the U.S. may be getting a further break on the back of weakening spot market differentials. 

Wholesale diesel prices are determined by a variety of factors. But the spot market that is the basis for a specific city’s supply is the most important factor. For example, Atlanta receives most of its diesel supply off the Colonial Pipeline, which is fed by refineries along the Gulf Coast. The spot market price in the Gulf Coast would be the starting point for wholesale price determination in Atlanta. 

Similarly, the price in Milwaukee would look to the Chicago market; Kansas City would key off a price known as Group 3, a designation that involves several Midwestern states. The West Coast keys off Los Angeles and to a lesser degree San Francisco and Seattle.

According to data provided by DTN, the spot market differential is falling sharply in several markets. The differential is the price more or less than the CME ULSD price traded in an individual spot market.

ULSD on the Buckeye Pipeline complex, which runs from Ohio and into the Northeast, fell Friday to 16 cents less than the CME price. Four days earlier, that spread was just negative 6 cents. On the first day of June, it was plus 7.5 cents per gallon. 

The differential in Chicago traded Friday at negative 21.5 cents per gallon, according to DTN. It opened in June at plus 5 cents.

There are signs of the impact of falling spot diesel differentials already. For example, the ULSDR.PHL price on SONAR for wholesale diesel prices in Philadelphia — which would be supplied by the Buckeye system — has declined more than 14 cents per gallon from June 22. But the outright price of ULSD on CME in that time, through the settlement Friday, was down less than 2 cents per gallon. 

All the predictions of a tight second-half oil market balance now have six months to prove whether they will come true. But the market’s actions on Monday suggest that some of the biggest suppliers are not seeing that strength in their order books.

Saudi Arabia announced Monday that its July supply reduction of 1 million barrels per day would be extended into August. On top of that, Russian Deputy Prime Minister Alexander Novak said his country would reduce its oil exports by 500,000 barrels per day, also in August, though several observers commented on social media that the reference to cutting exports rather than production could signal that a true output cut was not in the cards.

These reductions are on top of the 1 million barrels per day reduction in supply announced in April by the group of oil exporters known as OPEC+. Those cuts have been in effect since May.

And yet oil prices continue to decline. The price of global benchmark crude Brent topped $87 per barrel soon after the OPEC+ reductions were announced. Even after the one-two punch of more cuts announced Monday by Saudi Arabia and Russia, Brent slid 33 cents on the day to settle at $74.65 per barrel. It has not settled above $75 since June 21.

ULSD on CME fell Monday to $2.3773 per gallon, a drop of more than 7 cents on the day. The ULSD price is down 18.69 cents per gallon since a recent high of $2.5642 per gallon on June 21.

Energy economist Philip Verleger, in his weekly report on the market, said Monday that a key issue holding back oil prices is the failure of Chinese demand to increase anywhere near what was expected as it came out of its zero-COVID policies. On top of that, China is experiencing weak economic conditions in part because of a collapsing real estate market brought on by excess construction throughout the nation. 

“We would expect Chinese oil consumption to decrease in the second half of 2023 from the levels recorded in the second half of 2022, even after allowing for the impacts of the Covid-related shutdowns in 2022,” Verleger wrote. He said the decline could be as high as 600,000 barrels per day both this year and into next year, and that’s coming off a level that already was depressed as a result of COVID shutdown.

In its April report, the IEA estimated full-year petroleum consumption in China would average 16.16 million barrels per day for 2023 after being at 15 million barrels per day a year earlier. The forecast for the rest of the year summed up the bull case for oil that still has not emerged in prices. 

“Our oil market balances were already set to tighten in the second half of 2023, with the potential for a substantial supply deficit to emerge,” the IEA said in that report. “The latest cuts (announced in early April, which went into effect in May) risk exacerbating those strains, pushing both crude and product prices higher. Consumers currently under siege from inflation will suffer even more from higher prices, especially in emerging and developing economies.”

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