The benchmark diesel price used for most fuel surcharges rose a relatively small amount Monday even as the futures price for ultra low sulfur diesel continued to climb sharply.
The average retail diesel price published by the Department of Energy/Energy Information Administration rose 2.4 cents a gallon to $4.028. The increase came after three consecutive weeks of decreases, and those three weeks followed a week of no change.
A year ago, the price was $4.185 a gallon.
Retail prices always lag increases and decreases in futures and wholesale prices. That was driven home sharply this week, as the 2.4-cent increase in the diesel benchmark was published on a day when the price of ultra low sulfur diesel price on the CME commodity exchange rose to record a four-day increase of 17.17 cents a gallon. On Monday, ULSD rose 6.12 cents a gallon to $2.7882.
Markets for ULSD and gasoline have been leading the way in the overall increase in oil markets. The 3:2:1 spread, a basic indicator of refining margins, has been soaring. The 3:2:1 is obtained by subtracting the price of three barrels of West Texas Intermediate crude on CME from the price of two barrels of RBOB, an unfinished gasoline product on CME that serves as the proxy for gasoline, and one barrel of ULSD, after the price is converted to a per-barrel basis. As the 3:2:1 goes higher, it is a sign that refined products are moving higher at a faster rate than crude, or that crude is falling faster than refined products.
Much of the increase in 3:2:1 has been created by the switch in RBOB gasoline prices to an April delivery month from March. That occurred March 1. When the switch is made each year, the specification for gasoline in the U.S. rises to a tighter environmental standard for a gasoline specification known as Reid Vapor Pressure.
That switchover often causes prices to rise as the RBOB contract goes from March to April. But this year, the gain was more than 30 cents a gallon, an enormous increase compared to recent years, where it was often just a few cents.
The 3:2:1 closed out March at about $23.83 a barrel. When April RBOB became the prompt month, it shot up to more than $31 a barrel. It has climbed in recent days to close Monday at about $33.50.
Buyers of products like diesel, who are the ones who feel the brunt of the refinery spreads rising as evidenced in the 3:2:1 increase, may be getting some relief soon. The Whiting, Indiana, refinery of BP, which has been down or restricted since February due to a power outage, is back online. At 435,000 barrels a day, the refinery is one of the largest in the U.S.
A report from Reuters also should give some optimism to fuel buyers. The news outlet reported that data shows hedge funds have cut back on buying petroleum products, including diesel. “Previous bullishness about distillates has ebbed, with the combined position in U.S. diesel and European gas oil down to 55 million barrels (46th percentile) from 87 million (72nd percentile) five weeks earlier,” Reuters reported.
But in a surprise development, sanctions against Russian energy exports, which had proved to be increasingly toothless, are hitting supplies out of that country, according to a report from Bloomberg.
The report quoted Russian state oil tanker company PJSC Sovcomflot as saying that “US sanctions are putting pressure on its operations, the latest sign that the measures are complicating the delivery of the nation’s petroleum.”
There are individual tankers that are sanctioned by the U.S. Department of the Treasury. “Traders in Asia, by far the largest recipients of Russian crude, said the measures are making it harder and more expensive to find suitable ships for the trade,” Bloomberg reported.
Russia also is playing a role in higher prices as the target of stepped-up attacks on its infrastructure by Ukraine. Ukraine attacks on Russian refineries have added $2 to $3 per barrel in a risk premium, according to Vandana Hari, founder of oil market analysis provider Vanda Insights.
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