$6 average looms as diesel benchmark hits record

Meanwhile, the DTS.USA data series in SONAR, drawn from data provided by truckstop.com,  stood at $5.94/g Wednesday. 

The daily AAA average retail price first hit an all-time record Friday, when it was published at $5.85/g, surpassing the earlier high of $5.82 recorded in June 2022 after the Russian invasion of Ukraine.

That price has continued to increase since then, posted Wednesday at $5.9424/g.

The price of ultra low sulfur diesel (ULSD) on the CME commodity exchange has continued to move up. Although it took about a two-day dive Thursday and Friday that sliced about 15 cts/g off the price, dropping to settle Friday at $4.5402/g, those prices are far in the rearview mirror. 

ULSD settled Wednesday at $4.8010/g, an increase of 23.32 cts/g or 5.11%. A gain that large, barring some big reversal, all but guarantees that the average national price of diesel is going to smash through $6/gallon within a few days.

If the contract were to settle at that level Wednesday, it would be the highest settlement ever except for a one-day shortcovering surge at the end of April 2022 in the wake of Russia’s invasion, pushing that day’s settlement to $5.1354/g.  That end-month shortcovering rally was frenetic enough that it pushed the intraday high the next day to $5.85/g at one point. 

But that surge was short-lived.

Looking for a bear market argument

The case for a bear market in oil has been getting tougher to make, which is possibly one of the reasons why a recent Goldman Sachs forecast on oil got a high degree of attention (though most Goldman forecasts are closely watched).

While the report overall increased Goldman’s forecast to $85/b for the end of the year (it crossed $100/b on Wednesday) and $80 for next year, five dollar increases in both cases, it also made a few points aimed at deflating any price surge.

One, commercial land inventories in the western economies of the OECD “have so far barely drawn since the war began,” Goldman wrote. The report noted that inventory draws have mostly been from stocks on water, strategic inventories like the Strategic Petroleum Reserve, and from China. 

The report also said it expects Middle East suppliers will continue “adaptation, with production gradually recovering by the second half of 2027, as dark flows edge up further and pipelines come online in late 2027.”

But the Goldman report also lists price “upsides.” They include a price move in Brent to $120/b “if average Gulf output remains 4 million b/d below pre-war levels, versus 0.5 million b/d in our base case.”

That 4-million b/d estimate of current lost Gulf production is in line with a general consensus of current output, as compared to a pre-war level of about 20 million b/d.

Currie remains strongly bullish

Jeffrey Currie, who formerly headed the Goldman Sachs commodities research team, has seen his highly bullish predictions that he has been making for months start to come true, especially in the diesel market. 

Currie noted in a recent CNBC interview several product-focused problems that are driving up gasoline and diesel prices at a far faster rate than crude: 3 million b/d of refining capacity in the Arab Gulf nations taken out by military action; and reluctance to move gasoline and diesel out of the Gulf because “the one with gasoline is a sitting time bomb.”

The overall situation with crude, he said, is bullish because “you don’t have the insurance policies left anymore, and there’s no sign in sight that when you’re going to see a reopening of the Strait, whether it is 13 million barrels per day, or 15 going out.”

Those insurance policies include the drawdown of strategic stocks. It has been that source of supply that is one of the reasons why the private inventories referred to in the Goldman report have not been reduced as much as might have been expected. 

“All I do care about is six to 7 million barrels per day of production is shut in there,” Currie said. “That’s not going to change anytime in the near future.”

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