Small move in diesel benchmark masks more volatile underlying market

Diesel prices as measured by the weekly Department of Energy/Energy Information Administration average retail diesel price might suggest there isn’t much going on in the market.

The price released Monday moved up by 0.7 cents a gallon, to $4.593 a gallon. In the past 13 weeks, there have been 11 increases, one unchanged price and last week’s decrease of 4.7 cents.

But developments in Monday’s market, beyond the DOE/EIA price change that is the basis for most fuel surcharges, reflect a market in which prices shifted rapidly in just the past few days. However, they have moved in ways that may be difficult to understand for those who are not in the oil market but are deeply affected by its movements … like trucking companies.

The futures price of diesel on the CME commodity exchange fell sharply Monday.  But how much of that will make it to pump prices is not clear.

On Friday, the front-month price of ultra low sulfur diesel on the CME was for barrels delivered in New York Harbor in October. Friday was the last day for the October contract, and it settled at $3.3622 a gallon, an increase of 4.42 cents for the day. 

The November contract settled Friday at $3.3006 a gallon, for a 6.16-cents-a-gallon gap between October and November. With the October contract expiring Friday, the November contract became the front month on Monday. That means that the front month in the ULSD contract is suddenly about 6 cents per gallon less than where the front month was on Friday, just because of the “roll” from October to November.

On top of that, the November contract fell Monday by 7.81 cents from where it had settled Friday. Combine that with that 6.16-cent October-to-November gap, and it looks on the surface like ULSD on CME has gone down more than 13 cents a gallon in just one day.

But the wholesale prices that serve as the basis for what retailers pay to secure their fuel supplies are tied to spot market levels for barge or pipeline barrels traded in key market centers such as New York Harbor, Chicago or the Gulf Coast.

Those prices trade as differentials to the CME price. In a more normal time, when there isn’t a 6-cent gap between front-month and second-month ULSD on CME, the physical market differentials might not change much as the market goes from, for example, October ULSD being the front month to having November as the front month. The relatively small gap during more normal times means they don’t need to make that adjustment.

But on Monday, with the big move from October to November, adjustments needed to be made. And physical markets made them.

According to data from DTN, spot market differentials strengthened in almost every key region. That move to the upside could be interpreted as reacting to strength in the physical market. But the move in the futures market from October to November as the front month, and the sort of automatic 6-plus-cents move that went along with that, was likely more of a reason.

For example, spot market ULSD on the Buckeye Pipeline system that runs through Ohio and Pennsylvania was assessed by DTN Monday at 14 cents a gallon less than the CME price. Two trading days ago — Thursday — it was 20 cents when it was trading against the higher October number.

In the Chicago market, the spread went to negative 20 from negative 29 cents on Thursday. And in New York Harbor, according to DTN, the spread moved up to plus 6.5 cents per gallon Friday before retreating Monday to plus 5.75 cents. But on Thursday, it was negative 0.25 cents.

The end result is that wholesale prices being set Tuesday on the basis of Monday’s market will not be basing themselves off the futures market front-month decline of more than 13 cents a gallon. The companies that set those wholesale numbers will be looking at a spot physical market where the prices they key off of fell by a far smaller amount because the increase in physical differentials offset some of the decline in the futures market.

Crude markets Monday dropped significantly. West Texas Intermediate, which did not roll the spot month on CME, fell $1.97 a barrel to $88.82, its lowest settlement since Sept. 13.

Markets may have been impacted by a highly bearish forecast by Citi’s commodity research team led by icon Ed Morse. Citi has been the most prominent bearish voice for several weeks.

The report sounded themes Citi has offered in recent weeks, with the most central data point its belief that global oil production from several countries is on the rise. And Citi believes those increases will offset the cuts primarily from Russia and Saudi Arabia that it believes are driving prices higher.

The nations it sees as increasing output are the U.S., Canada and Guyana — of countries that are not part of the OPEC+ group — and Iran, Iraq, Libya, Nigeria and Venezuela of those that are.

But even in the products market, where diesel spreads relative to crude have been strong, Citi sees an easing. New refining capacity around the world has been slow to come online, Citi notes.

However, that new capacity “is still coming in 2024,” Citi said in its report. That growth in refining capacity eventually “should drive lower cracks in 2024,” Morse’s team wrote.

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