The benchmark Department of Energy/Energy Information Administration average retail diesel price increased Monday by the biggest amount in seven months, with the likelihood of more increases ahead.
The latest level of $3.477 per gallon was up 7.1 cents a gallon, the biggest increase since a jump of that same number on March 8. On an outright basis, the latest price is the highest since it was at $3.535 a gallon on Dec. 8, 2014.
Monday’s increase marked the third week in a row that the price, used as the basis for most fuel surcharges, has increased. Price increases have now been recorded in seven of the past 11 weeks; before that, the DOE/EIA price posted increases for 12 consecutive weeks.
The Monday posting of the price has followed an odd pattern recently: Although the overall trend has been higher, commodity trading on Mondays, for no apparent reason, has tended to decline on days when the DOE/EIA price posts an increase.
But that wasn’t the case this Monday as the market is pointing toward higher diesel prices on several fronts.
On the CME commodity exchange, the price of ultra low sulfur diesel (ULSD) rose 5.39 cents a gallon Monday, jumping 2.26%. The front month of ULSD last Thursday was $2.3417 per gallon. That means the front-month price of diesel has now risen almost 9.5 cents a gallon in just two trading days.
There are other signs pointing to higher diesel prices. The spread between ULSD and world crude benchmark Brent has risen to more than 50 cents per gallon. That is the highest level in almost two years and it suggests that diesel markets are stronger than crude, which itself hit levels not seen since 2014 in Monday trading.
Another bullish sign: the spread between front-month ULSD and the price 12 months out on the forward curve. When a market is tight, the value of the front-month contract increases faster than those in the “out” months, as the barrel for immediate delivery becomes the most desired due to tight supplies. When the front-month contract is more valuable than the “out” months, it is a situation known as backwardation.
The 12-month backwardation broke through 13 cents per gallon on Monday. It has been just over 13 cents a few times in recent days. But the Monday spread of 13.56 is the highest it has been in several years. Two months ago, the spread was about 7 cents.
Oil prices rose Monday despite a plunging equity market. Those markets have tended to move in tandem, though not always. However, with a decline in equity markets of the magnitude posted Monday — the S&P 500 fell 1.3% — to get an increase in global crude benchmarks near 2.5% is unusual.
The OPEC+ group did increase its output for October by 400,000 barrels per day. But at a forum sponsored by Energy Intelligence, Amin Nasser, the CEO of Saudi Aramco, said it is his company’s estimate that oil consumption has risen by about 500,000 barrels per day in recent months because of high natural gas prices.
Some electricity generation and other uses can switch to oil and away from natural gas, which outside the U.S. has soared well beyond the increase in the U.S. What that means is that the switching away from natural gas and to oil will eat up all the increase that OPEC+ will put on the market this month, and supplies will still be 100,000 barrels per day short of what the switching means for the oil market.
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