Diesel at pump still sliding as futures, wholesale mostly trending higher

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Retail diesel prices continued to slide last week, per the Department of Energy/Energy Information Administration retail weekly diesel benchmark, with the broader market still trying to figure out whether tensions in the Middle East are going to lead to tighter oil supplies.

The DOE/EIA price fell 5.4 cents per gallon to $4.444 per gallon Monday. With recent declines, it’s the lowest price since Aug. 21, when the number was posted at $4.389/g.

There have been six trading days since the Hamas-led attack on Israel on Oct. 6. The overall trend has been higher; ultra low sulfur diesel on the CME settled Oct. 6 at $2.9008/g and settled Monday at $3.1492/g.

But it has been an up-and-down road to get there, with four days of increases (including a 16.68 cents-per-gallon gain Friday) and two days of declines, including Monday’s 6.25 cents-per-gallon fall. The big move on Friday wasn’t even attributed by most market analysts to the presumption of a wider war in the Middle East; instead, it was mostly because the U.S. took action against two shipping companies for violating the price cap on Russian oil shipments.

S&P Global Commodities Insights (SPGCI), in one of its online “Factboxes,” recently spelled out the actual disruptions to energy supplies so far — minimal — and what may lie ahead. Most of its findings were on natural gas, as shipments from an offshore Israeli oil field to Egypt have been disrupted and rerouted.

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But SPGCI also quoted Jim Burkhard, its vice president and head of research for oil markets, energy and mobility, as warning that “500,000 b/d of Iranian exports could be at risk if the US tightens sanctions.”

According to the Factbox, Burkhard said in a note last Wednesday, “Biden will be under pressure to enforce sanctions and curtail Iranian export revenue.”

Rising Iranian production has been a key factor in slowing the march of crude oil to $100 per barrel, which seemed destined to occur just a few weeks ago. Brent crude, the international benchmark, settled Monday at $89.65. Its recent high was Sept. 27, when it settled at $96.55/b.

SPGCI estimated that Iranian production in April was 2.62 million barrels per day. In its most recent report, the group estimated Iranian output in September at 3.1 million b/d, up from 2.95 million b/d a month earlier.

One notable development in markets in the past weeks that could impact diesel, with acceleration in recent days, is that the margin for producing gasoline from crude has fallen, by some measures, to less than zero.

And the spread between the futures price of RBOB gasoline, the unfinished gasoline product used to establish the futures price of gasoline, and ultra low sulfur diesel on the CME has blown wide open. It recently has been at about 90 cents per gallon, with ULSD priced that much above RBOB, while that spread averaged 47 cents per gallon between the start of August and the end of September.

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How that could impact diesel is that refiners will look to maximize their diesel output going forward, as the margins to make diesel remain healthy. That could provide the opportunity to build inventories that have been below historic norms in all the key markets of the world.

The possible negative impact for diesel consumers from that trend of weak gasoline is that diesel margins can’t overcome the lack of profitability for making gasoline and that could lead to run cuts. The 3:2:1 spread — a basic indicator for refining profitability by comparing the price of three barrels of crude to two barrels of gasoline plus one barrel of diesel — was above $35/b from roughly mid-June to the end of August. On Monday, it stood at about $18/b at the close of trading.

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