Small increase in DOE/EIA diesel price masks underlying volatility

In a market of wild volatility, the latest weekly diesel price from the Department of Energy/Energy Information Administration almost looks like owners of retail outlets simply couldn’t figure out what to do next.

Wholesale prices in the U.S. as measured by the ULSDR.USA data series in SONAR swung from a high of $3.288 a gallon on Aug. 10 to a low of $3.227 last Thursday before climbing back to $3.36 on Monday. Those sorts of movements in wholesale diesel prices are highly visible to retail owners and can disrupt the decision-making on what price to put on the pumps. Retail owners aren’t generally set up to react to that sort of rapid movement.

That could be the reason why in the midst of such volatility, the pace of increases in retail diesel prices slowed in the past week, according to the DOE/EIA. The weekly price, used as the basis for most fuel surcharges, climbed just 1.1 cents a gallon last week to $4.389/g after four consecutive increases that ranged from 9.9 cents to as much as 22.2 cents a gallon. Those increases resulted in the price used for most fuel surcharges going up by 57.2 cents in four weeks; the latest increase now puts it at 58.3 cents a gallon in five weeks.

Prices for ultra low sulfur diesel on the CME commodity exchange have led the way in the volatility that shows up in the wholesale numbers. On Aug. 7, ULSD on the CME commodity exchange settled at $3.0155 a gallon. Within two days, it was more than $3.20. Four days later, it was down to $3.028. Three more days, it was just under $3.16. On Monday, the first trading day after that, it settled down 4.35 cents a gallon to $3.1162.

That sort of volatility and the fact that even with some big drops in there the price overall has trended higher has fueled the concern among analysts regarding the state of diesel going into the harvest season and then the winter heating season, when heating fuels are chemically highly similar to diesel. Last week’s EIA inventory report did little to quell that concern. During a time of the year when stocks traditionally rise, inventories of ultra low sulfur diesel in the U.S. barely budged and stand at about 83% of where they normally are at this time of year.

The East Coast is beginning to be a particular area of worry. In his weekly report, energy economist Philip Verleger, quoting OPIS price sage Tom Kloza, notes that two significant East Coast refineries are about to undergo heavy maintenance. Spring and fall are maintenance seasons in the refining sector.

Verleger quotes a recent report from Kloza that the Irving Oil refinery in New Brunswick, Canada, would be shut for about seven weeks, bringing to a halt a large plant that refines 320,000 barrels per day. “It is a substantial supply source for the U.S. East Coast,” Verleger writes.

He also notes the planned closure of Monroe Energy, the relatively small 185,000-barrel-a-day refinery owned by Delta Airlines near Philadelphia. That will be closed for about two months.

“Taken together, the closings may reduce supply by around 140,000 b/d (of distillates) for 60 days and cut East Coast inventory accumulation by seven to eight million barrels compared to the same period in 2022,” Verleger writes.

The East Coast last year already saw significant price premiums compared to the national average retail diesel price. In May 2022, riding on tight inventories then, the DOE/EIA price for the East Coast got as high as 33.4 cents a gallon more than the national average. It then retreated, but the spread started climbing again in late fall of last year, peaking at a 27.1 cents right after Christmas. That premium did not drop below 10 cents a gallon until April.

In this week’s data, East Coast retail diesel was just 2.4 cents a gallon more than the national average after being 0.9 cents a gallon higher last week. There also is no sign yet of a squeeze in the spot markets. According to data from DTN, the spread between the ULSD price on the CME and the price of spot physical barges in New York Harbor was 1.5 cents a gallon in favor of the barges at the start of August. Last week, barges were 1.5 cents a gallon less than the futures price before  moving up slightly Monday.

The East Coast refining sector is inadequate to supply the needs of the market, and imports are necessary. “The U.S. East Coast’s dependence on imports when all refineries there were operating highlights the increased risk of extremely high prices occurring in the next few months during and after the refinery shutdowns,” Verleger says in his report.

That could be offset by more production in the U.S. Gulf Coast region, he adds. But that has declined also, Verleger notes, citing the fact that the light sweet crudes coming out of the U.S. shale sector do not produce strong yields of distillates such as diesel.

Other spot markets in the U.S. are not showing signs yet of a physical squeeze. 

But that doesn’t negate the fact that in July, the spread between ULSD and Brent, the world’s crude benchmark, averaged 31.3 cents. So far in August, that spread has been more than 44 cents a gallon. It is that sort of movement that is leading to the concern over what the coming months hold for diesel prices.

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