An increase in the weekly Department of Energy/Energy Information Administration average retail diesel price was about the only thing in the oil market pointing higher Tuesday.
The diesel price used as the basis for most fuel surcharges rose 4.7 cents, to $3.631/gallon. It’s the fourth consecutive week the price has risen.
Release of the price came a day later than usual due to the Columbus Day holiday Monday.
But it moved higher in a market that after significant gains in futures prices has now turned decidedly lower. There is a lag between increases or decreases in futures and wholesale prices. (The latter tracks the former relatively closely.) The divergence of a higher retail price from DOE/EIA this week in the middle of a sell-off in futures price is a clear example of that market feature.
Ultra low sulfur diesel (ULSD) on the CME commodity exchange fell for the third consecutive day Tuesday, with the two-day decline totaling 15.67 cents a gallon. Tuesday’s settlement of $2.1877 per gallon, down 8.65 cents on the day, dropped the ULSD settlement to its lowest level since Oct. 2.
What happened in the interim was that not just the prospect but the reality of military action between Iran and Israel resulted in all oil markets, not just ULSD, spiking higher. In the ULSD market, the recent high settlement of $2.3962, recorded Monday, was 33.82 cents per gallon more than a recent low of $2.058 a gallon, recorded Sept. 10.
But since that initial frenzy that pushed prices higher, traders in the market reversed course when the Israel-Iran conflict got quiet and the feared attack on Iranian oil facilities didn’t materialize. In recent days, there were several reports that Israel had told the U.S. that when it came time to attack, Iranian oil facilities would not be targeted, leading to the big sell-off on Monday and Tuesday.
It isn’t just the recent swings in the Middle East political landscape that have been driving prices. The reality is that one year after the Oct. 7 attack on Israel, there has been no loss in oil output. If there has been a disruption to oil supplies, it has come from Houthi attacks on shipping in the Red Sea and by extension the Suez Canal.
But concerns that oil prices would rise from longer shipping times due to diversion from the Suez Canal and shipping instead around the Cape of Good Hope never turned into actual evidence that prices were rising.
Longer term, the monthly supply/demand report of the International Energy Agency issued Tuesday had an overview of the market that should make truckers happy.
The focus in recent reports has been on demand, as its continuing slowdown leaves supply more than adequate. The IEA sees that trend continuing.
According to the group’s October report issued Tuesday, the increase in global demand in 2024 was down about 40,000 to 50,000 barrels per day from the prior month’s growth forecast.
Other statements in the report that can’t be read as anything other than bearish for prices include:
The observation that OPEC+ spare capacity is about 5 million barrels a day, which except during the pandemic is at “historic highs.”
The fact that global product inventories are at three-year highs even as crude stocks are less than the five-year average for this point in the calendar.
And the fact that even with the drawdowns of inventories to counter the loss of Russian crude soon after that country invaded Ukraine, strategic stocks held by IEA members are enough to cover 75 days of refinery runs in the nations of the IEA.
“For now, supply keeps flowing and in the absence of a major disruption, the market is faced with a sizable surplus in the new year,” the IEA said.
Crude output from OPEC+ dropped sharply in September, according to S&P Global Commodity Insights. But of that 500,000-barrel-per-day decline, which is a large one-month fall, about 410,000 barrels a day came from Libya, which went through another political crisis that reduced output but is now resolved. An additional 130,000 barrels a day came from Iraq, which had been under significant pressure to reduce its output relative to its OPEC quota. Other nations in the OPEC+ group of exporters held their production steady or had slight increases, according to SPGCI.
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