The benchmark diesel price used for most fuel surcharges rose Monday, ending a string of 10 consecutive weeks of declines.
The price posted Monday by the Department of Energy/Energy Information Administration rose 1.3 cents a gallon to $3.539. It was the first increase since July 8, when the price climbed 5.2 cents to $3.865, 32.6 cents per gallon more than the latest price.
Monday’s increase comes after several days in futures and physical markets that had shown signs of a possible rebound from the slide in diesel prices that has been the feature of markets since early July, when the commodity price of ultra low sulfur diesel (ULSD) on the CME commodity exchange stood at about $2.60 a gallon.
That futures price for ULSD bottomed out Sept. 13 with a settlement of $2.0843 per gallon – the lowest settlement since late November 2021.
But after a sharp increase that added almost 9 cents per gallon to the price in just four trading days, to a settlement last Thursday of $2.172, the price of ULSD on CME has fallen two days in a row. On Monday, it dropped 1.64 cents to settle at $2.1451, just a little more than 6 cents above the recent low.
John Kemp, the former chief energy correspondent for Reuters who now provides independent commentary on markets, reviewed the data on futures holdings in the past week in both the U.S. and Europe. He described the positions by traders that are short the market – meaning they are betting on a decline – as being at record levels.
Those short positions in diesel have been taken, Kemp said, “as inventories climb and manufacturers report a deepening slowdown in business activity across all major industrial regions.”
“Persistent selling has anticipated, accelerated and amplified the slump in both crude prices and distillate refining margins over the last two months,” Kemp added.
The reference to the refining margins reflects the fact that diesel has fallen at a faster rate than crude.
In early July, converting the per-barrel price of crude to a per-gallon price and comparing the futures prices of Brent crude to ULSD yielded a spread of about 57 cents a gallon. But that same comparison now comes in at 36-38 cents per gallon, so that about 20 cents of the decline in diesel prices can be attributed to weakness in that market rather than the overall decline in crude.
The few market bulls that are still out there have pointed to data on inventories showing that levels remain relatively tight, and certainly are not on a course that would suggest a steep fall in the price of oil is justified.
For example, inventories of ULSD in the U.S. for the week ended Sept. 13 were 125.1 million barrels, according to EIA data. While that is more than the two prior years for the second week of September, it is still less than the five-year average of 128.2 million barrels, a figure that excludes the swollen inventories of 2020.
But in his weekly commentary, economist Philip Verleger said that may be a function of storage just not being as valuable as it usually is.
Verleger quoted a report from Energy Intelligence, a publishing company with a variety of outlets covering markets.
“Global storage levels are loosening their tight link to benchmark oil prices due to profound structural changes in the market,” the EI report said. “New forms of trading, changing crude supply flows and geographical shifts in refining hubs and demand centers have combined to reduce the influence of inventories on price formation.”
Verleger sums up the situation with an observation that should make any consumer happy: “The prospects for higher prices are dismal given limited possibilities for consumption increases, further discoveries across the world, the enfeebled oil cartel structure (technically, a failing restrictive commodity agreement), decreasing refining margins, diminished support from commodity speculators, and eroding confidence in oil producers’ ability to rectify the situation.”
Bloomberg notes another bearish factor in the market. It reported last week that the autumn maintenance season in the U.S. – when refiners undertake major projects that can require significant refining capacity off the market – is expected to be light.
Those refiners are going to take only about 529,000 barrels per day of refining capacity offline, Bloomberg said, quoting IIR Energy, an analytics firm.
Bloomberg reported that’s about half the amount taken offline last year and is the lowest since 2021.
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