Oil markets are wrapping up a November that has seen significant gains in the price of crude but even larger increases in the price of diesel.
While trading is ongoing Friday and the month isn’t over, the numbers through Wednesday’s settlement were striking, particularly for diesel. The price of ultra low sulfur diesel on the CME commodity exchange settled Wednesday at $1.3866 a gallon, a jump of 30.53 cents since its settlement on the last trading day of October. That’s a gain of 28.2%.
That settlement Wednesday also marks the first time it has been above the settlement of March 5. That is a date that might be viewed as the last day in oil markets before all hell broke loose. The March 5 settlement of $1.3852 a gallon was followed a day later by a decline of more than 22 cents as financial markets began to fully price in the prospect of global shutdowns and a collapse in oil demand due to the pandemic. The March 5 settlement is a sort of arbitrary dividing point but one that many observers are using in describing the before/after in pandemic financial markets.
And while the ULSD price on CME is the starting point for determining the ultimate price at the pump, it’s not a price that has direct exposure to truckers. But the prices that do are reflecting the stronger market. The daily retail diesel price reflected in the DTS.USA data series in SONAR was at $2.548 a gallon on Thursday, up from $2.335 on the last day of October, a jump of 20.3 cents a gallon. Wholesale diesel sold at what is known as the “rack” jumped to $1.524 Thursday from $1.247 a gallon at the end of October, up almost 30 cents.
The one area that has been lagging has been the weekly price of average retail diesel reported by the Department of Energy’s Energy Information Administration. That price is the basis for most fuel surcharges.
Given that it is just a weekly price, there will always be a lag on the way down or on the way up. In the price posted Nov. 2, which would have taken in levels at the pump just as October ended, the DOE/EIA price was $2.372 a gallon. In the most recent number, published Monday, it was up just 9 cents over the course of the month, suggesting in comparison to the DTS.USA data series that the DOE number is lagging significantly behind the increases consumers would be paying at retail.
As far as crude, the benchmark U.S. WTI grade rose an almost exact $10 a barrel through the day before Thanksgiving, climbing to $45.71 a barrel from $35.79 a barrel at the end of October. The global benchmark Brent crude price was up more than $11 a barrel, to $48.61. The forces propelling oil higher are mostly macroeconomic — rising financial markets in general driven by optimism about a vaccine — and factors that specifically boost commodities, such as a weaker dollar.
If you do the math against those crude prices, you will find that diesel rose significantly more than crude in November. Looking at a simple spread between ULSD and Brent, the price of diesel’s premium to Brent rose about 4 cents a gallon over the course of the month. That is a significant move.
The reason is simple: A lot of the inventory build that occurred in diesel markets earlier this year has disappeared. As Reuters oil columnist John Kemp said in a story about diesel markets published Friday, “U.S. stocks of distillate fuel oil are rapidly returning to normal, reversing the prodigious glut that built up earlier in the year during the first wave of the coronavirus epidemic and lockdowns.”
When oil markets collapsed in March and April, refiners were faced with tough choices. Demand for gasoline plummeted by historic levels, as people all around the world stayed home. The market for jet fuel fell even more as planes were grounded and the few that were flying had rows of empty seats.
That meant that refiners turned to making diesel. The decline in demand was never as steep as for gasoline or jet, so even as overall refinery operating rates were being sliced, more of what was coming out of refineries emerged as diesel fuel. But demand did not keep pace with the rise in diesel output.
What happened then was fairly predictable: Inventories soared. Measured in days’ cover, which you get by diving inventories by average daily demand, distillate inventories in the U.S. (which include diesel) rose to more than 50 days for several consecutive weeks. The number tends to be closer to 30 days, and it had never been above 50 for that many weeks in the history of the data going back to the early ’90s.
But refiners have shifted. They’re making more gasoline again, they’ve gotten jet fuel inventories under control and the distillate days’ cover number for the U.S. most recently stood at 35.5 days. That is still well above the 28.4 five-year average for this time of year. But it’s a lot less than 50.
There are some signs pointing to the possibility that the surge in diesel prices may be nearing a peak. The U.S. diesel market is not an island; it is part of a fully integrated global market, with U.S. exports of diesel to Europe a key price factor. Another thing to note about Europe: Diesel is a key fuel for passenger vehicles, not just trucks.
In her most recent market analysis, Singapore-based Vandana Hari reviewed mobility data in Europe during the spring lockdown for the five biggest countries: U.K., France, Germany, Italy and Spain. “A back-of-the-envelope calculation suggests the mobility curbs would lead to around 600,000 b/d decline in diesel consumption across the five countries,” she wrote. By contrast, the drop in U.S. consumption between March and April of this year was about 306,000 b/d, according to the EIA.
Europe is also dealing with significant stocks. For example, S&P Global Platts reported that lower water levels on the Rhine River, a key waterway for moving diesel barges, is at low levels. That has restricted movements, which normally might boost prices. But it hasn’t mattered, according to Platts, because inland diesel inventories are at such full levels that the temporary reduction in supply is not creating market tightening.
Another factor in the market is largely expected to be a non-factor: OPEC. The OPEC+ group of nations, which includes OPEC countries as well as several non-OPEC countries led by Russia, will meet this coming week. But Hari said a rollover of the existing output reduction of 7.7 million barrels per day is expected to be ratified. That cut was to be narrowed to 5.7 million barrels per day in January, but a return of significant crude supplies from the always volatile nation of Libya has eliminated the need for more oil from other OPEC nations, she said.
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