Retail diesel drops again as oil futures markets head higher

Oil markets have been trending higher in the past week and got another boost — albeit a muted one — Monday from the weekend events in Russia, but the benchmark retail diesel price declined for the 19th time in the past 21 weeks.

The Department of Energy/Energy Information Administration average U.S. retail diesel price used for most fuel surcharges declined 1.4 cents a gallon to $3.801. It meant that last week’s increase of 2.1 cents a gallon, which ended a string of eight consecutive weeks of declines, proved short-lived.

Monday’s latest decline came even as futures markets in oil have been increasing. From a recent low of $2.3091 a gallon on June 12, ultra low sulfur diesel (ULSD) on the CME commodity exchange climbed as high as $2.5642 Wednesday before sliding back to $2.4071 to close the week. 

Prices were higher Monday partly on the back of the weekend short-circuited coup in Russia, or whatever it’s being called. However, the overall increase in ULSD of 3.17 cents a gallon to a settlement of  $2.4388, up 1.32%, could be considered tame given that the prospect of a change in government or at least some sort of upheaval in the world’s third-largest oil producer might at other times be deemed enormously bullish for prices.

But a report from Reuters, quoting traders and the Refinitiv Eikon analytics firm, said there were no reports of supply interruptions.

ULSD on the CME did trade almost 3 cents a gallon more than the settlement earlier in the day, topping out at $2.4651. Diesel significantly outperformed the increase in Brent, the world’s crude benchmark. That was up 45 cents a barrel to $74.18, but that marked a gain of just about 0.6%. 

That Brent-ULSD spread in recent days has ranged as low as roughly 62 cents a gallon and as high as 72 cents a gallon. The strength shown Monday took the spread up to about 67.2 cents a gallon from roughly 64.9 cents at the close Friday.

That diesel might be more bullish than crude on the back of the Russian news is not surprising. Russia is a major supplier of diesel to the world market and recently, according to a Bloomberg report, has been processing crude to make products like diesel and gasoline at extremely strong rates.

The Bloomberg report said Russia’s refineries had increased their crude throughput to the highest level in 10 weeks as maintenance season in the country comes to an end. According to the report, Russian refineries processed 5.6 million barrels a day of crude in the week that ended June 21, an increase about 115,000 barrels a day from just one week earlier. The most recent week during which the country processed as much as it did last week was in early April. 

But the gains may be short-lived. The Bloomberg report also said Russia is considering reducing subsidies it pays out to its refining sector, as spending is refocused on the war in Ukraine. Facing the loss of those subsidies, the Bloomberg report said, some refineries are cranking up operating rates as high as they can now as they face the prospect of reduced subsidies, possibly as early as September.

One potential market factor that could support the price of diesel: a sudden surge in natural gas prices in the U.S. The Henry Hub contract on the CME has soared from a June 1 price of about $2.15 per million BTUs (mmBtus) to a settlement Monday of $2.791 per mmBtus.  

Diesel and natural gas can be substituted for each other in some applications, a switch that was believed to have occurred in large amounts last year when U.S. natural gas at times approached $10/mmBtus.

However, various market reports said the recent increase in natural gas prices is tied less to fundamentals and more to short covering as trading in the July contract on CME comes to an end this week. Large short positions held by traders — in essence, bets that prices would continue to decline — are finding they need to bid prices higher to cover their short positions in the July contract. 

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