After a reversal of a string of declines last week, the benchmark Department of Energy/Energy Information Administration average weekly retail diesel price headed down again.
The latest posting is $4.077 a gallon, down 3.9 cents a gallon. The price has now declined in 21 of the past 26 weeks and is down $1.264 per gallon since the posting of Oct. 24. It’s also the lowest price since a posting of $4.104 a gallon on Feb. 28, 2022.
The renewed drop in the price used for most fuel surcharges comes as oil has been trending lower in futures markets, with diesel particularly weak.
Ultra low sulfur diesel on the CME commodity exchange settled Monday at $2.531 a gallon, a rebound from the Friday settlement of $2.4486. That Friday settlement was the lowest for the ULSD contract since the first trading days of January 2022. The Monday settlement marks a roughly 13-cent decline since the start of April.
The rebound in diesel futures prices Monday also was accompanied by, at least for one day, a reversal of another trend that has been good news for diesel consumers: the weakening of diesel prices relative to crude.
The spread between Brent and ULSD on CME bounced back to the 56- to 57-cents-a-gallon range from Friday’s spread of about 50 cents. But it was 90 cents as recently as a month ago.
Since the beginning of 2022, what has been particularly notable about diesel is how much it had soared relative to crude. That spread averaged about 40 cents a gallon through 2021. In 2022, it averaged about $1.06 per gallon.
Numerous theories have been advanced to explain the surge, including the reality of IMO 2020 having an impact on the market finally in 2022, after its effect was delayed by the pandemic from its formal launch in 2020. IMO 2020 requires lower sulfur content in marine fuels. Diversion of diesel molecules into the supply of marine fuel to meet those standards was being predicted long before IMO 2020 took effect.
Analysts are citing two reasons for the recent decline in diesel relative to crude: a general slowdown in economic activity, as diesel is considered the workhorse of industrial activity, and a decline in ocean freight traffic, which would affect marine fuels that now contain more diesel molecules than pre-IMO 2020.
One other factor signaling continuing weakness in diesel is the spread between the first- and second-month diesel prices on CME. Since August 2021, that spread has been in a relationship known as backwardation, with the first-month price higher than the second-month price. A market in perfect balance has the price rising as it goes out the calendar, a structure known as contango.
When markets are tight, particularly as measured in inventories, they can shift into backwardation, as the current-month barrel becomes the most desired.
The Monday settlement of $2.531 a gallon was just 84 basis points — 0.84 cents — more than the second-month settlement. Last October, when the market was extremely tight as it prepared for winter, that spread averaged 34 cents a gallon.
Although U.S. inventories reported weekly by the EIA are tight compared to historic norms for this time of year, the collapse of the backwardation suggests a significant weakening in demand, and the data is showing that, too.
The energy consulting firm Energy Aspects, in its monthly summary of markets for middle distillates such as diesel, said Monday that European diesel inventories “likely” declined by 11 million barrels in March but that EA expects stocks to build by 23 million barrels between now and August.
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