The benchmark price used for most diesel fuel surcharges declined for the seventh straight week.

Tuesday’s price, delayed a day due to the Memorial Day holiday, came the same day as one of the larger one-day increases in the price of ultra low sulfur diesel (ULSD) on the CME commodity exchange in several weeks. 

The average weekly retail diesel price published by the Department of Energy/Energy Information Administration fell 3.1 cents a gallon to $3.758. It’s the eighth time in the past nine weeks the price has declined.

Since the DOE/EIA price was set at $4.061 a gallon on April 8, the number is down 30.3 cents. In the past year, the price is down 9.7 cents a gallon, which means there have been a lot of ups and downs — the highest price in the past 12 months was $4.633 a gallon on Sept. 18 — to ultimately wind up not all that far from where it was right after Memorial Day last year.

On the CME Tuesday, ULSD rose 5.14 cents, to $2.465 a gallon. That was the biggest one-day jump since an 8.4-cent-a-gallon increase on April 2.

There were no specific market-related reasons cited for the increase. Looking for an explanation, analysts cited a particularly violent weekend in Gaza, with an Israeli strike killing numerous Palestinian civilians and a cross-border clash between Israel and Egypt near the Rafah border crossing between Gaza and Egypt that resulted in the death of an Egyptian soldier. None of that has any impact on crude output.

But when it comes to the diesel market itself, the news is mostly bearish.

A giant new refinery will export diesel

The latest development that has the potential to weaken diesel prices is the report that Nigeria’s giant Dangote refinery, which kicked off operations earlier this year, is going to begin exporting diesel that meets the demanding specifications of the European Union in June.

Argus Media reported that Nigeria’s vice president for oil and gas, Devakumar Edwin, disclosed the plans at an oil and gas forum in Lagos, the country’s former capital and still its key commercial city.

The Dangote refinery has capacity of 650,000 barrels per day, one of the largest new refineries to come online anywhere in the world in years. It had begun its export program by selling products that need less processing than diesel, such as naphtha.

But it is now ready to produce and export diesel with 10 parts per million (ppm) sulfur or less, which meets not only the European specification but also that in the U.S., where the specification is 15 ppm. But the Argus report said Dangote had received recent approval to begin operations at its residual fluid catalytic cracker, an upgrade in its operations that allows it to produce the European-specification diesel. 

Although the U.S. market does not appear to be targeted for now, that is not surprising given that the U.S. is a huge net exporter of diesel. According to the latest EIA statistical report, for the week ending May 17, total U.S. imports of ultra low sulfur diesel — which has sulfur content of 15 ppm or less — were fewer than 100,000 barrels per day. U.S. diesel exports tend to be in that 100,000-barrel-per-day range most weeks.

But exports for the week for all nonjet fuel distillates, which are mostly diesel, were 1.22 million barrels a day. Exports tend to run between 1 million and 1.5 million barrels per day.

The path for Dangote exports to impact U.S. diesel markets is if they back out U.S. exports to Europe, pushing more into the domestic market.

The monthly report on middle distillate markets from Energy Aspects released in recent days also noted several market factors that point to continued diesel weakness.

Diesel on CME several weeks ago moved into contango, with the front-month contract — currently June — having the cheapest price. The second month is higher, and that continues for just a few months or many months, depending on market strength or weakness. As a market weakens, it pushes the market deeper into contango.

In its monthly report, Energy Aspects said diesel markets were “[languishing] in a shallow contango as importers are pricing to keep from being flooded with excess supply.” The market is now in “equilibrium,” but the research group said it was unlikely to last.

“We expect pressure on spreads to mount again as the summer progresses to facilitate storage economics while global diesel net length rises in Q3 24,” Energy Aspects said; in nontrader speak, that means the contango will likely deepen, which encourages stock building, and that means inventories should rise, which is a bearish factor for markets.

But any excess supply is not likely to go into land-based storage tanks, Energy Aspects said. The contango isn’t deep enough to overcome the cost of land storage, which means it is likely that “incremental volumes will be pushed onto the water rather than into tanks.”

If that is the case, the growth in storage may not show up in the weekly EIA inventory report, where U.S. stocks have been stuck between 106 million and 108 million for several weeks. But it will be out there in the market, and ultimately, it can’t be hidden on a ship.

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