The diesel price benchmark used for setting most fuel surcharges is getting closer to a number it has not seen for about 15 months.

With a 5.9-cent decline posted Monday, the latest Department of Energy/Energy Information Administration price of $4.018 a gallon just needs another drop next week of 1.9 cents to fall to less than $4. The last time the weekly price came in at less than $4 was Feb. 7, 2022, just a few weeks before Russia invaded Ukraine and set off a wild ride in oil markets that in the past few months has returned to some sense of normalcy.

Weekly prices have now declined 12 of the past 13 weeks and are down more than 60 cents a gallon from the $4.622-a-gallon price of Jan. 30, a recent high-water mark. Since the $5.81 all-time high price of June 20, DOE/EIA’s closely watched weekly number is down almost 80 cents.

It wasn’t just that benchmark price signaling a weaker diesel market on Monday.

In an otherwise relatively calm day of futures trading on CME, something developed at the end of the day that hadn’t been seen on the ultra low sulfur diesel contract since August 2021: a contango.

In a perfectly balanced market, the second-month price in a particular contract is higher than the first-month contract. The third is higher than the second and so on. That upward curve reflects the time value of money and the cost of storage. 

But when markets are tight, the need for more immediate supplies takes over and the first month becomes the highest-priced month. The second month is less. The backwardation may reverse itself back into contango at a certain point along the time series, but the front month to second month is considered an important sign.

The shift into contango was created to a large degree by the expiration Friday of the May ULSD contract. The May/June spread closed out trading in a backwardation, but the June/July spread already was in contango. With June becoming the front-month contract Monday, contango returned to the first-month/second-month spread for the first time in about 21 months.

In the three years before the pandemic, ULSD inventories for the third weekly report of April came in at 135 million barrels, 107.6 million barrels and 118.2 million barrels, respectively.

And while there  has been a great deal of talk about weak demand, the EIA’s “product supplied” category for all nonjet fuel distillates is running weaker than normal but not by a huge amount. The five-year average for the third report of April, excluding 2020, comes in at 3.772 million barrels a day of distillate demand. The most recent report puts distillate demand at 3.728 million b/d, just slightly below that average.

But diesel continues to weaken against global crude benchmark Brent. A front-month to front-month comparison Monday puts ULSD at 48.48 cents a gallon more than crude, normalized to gallons. At the start of April, that spread was about 64 cents a gallon.

The weakness in the oil market in general is being attributed to broad macroeconomic factors, such as China’s vaunted reopening not turning out to be quite the demand kick that had been expected, and a supply side that is not seeing much evidence of the cuts in crude supply agreed to by OPEC+ starting this month. But that does not explain the drop in diesel, which from a U.S. perspective has demand and inventories relatively near normal. 

The question is what is normal. In 2022, a year rocked by the Russian invasion of Ukraine, the diesel-to-Brent spread was about $1.06 a gallon. In 2019, the last year that didn’t have either a pandemic or a major war involving a large oil producer that the world attempted to sanction, the spread was 41 cents. Current spread levels are far closer to that. 

 More articles by John Kingston

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