Just as the oil markets are getting hit with chatter about how much diesel has fallen relative to crude oil and gasoline, the benchmark used for most fuel surcharges posted its first increase since the end of January.
A 10-week string of declines in the Department of Energy/Energy Information Administration weekly average retail diesel price rose 1.6 cents per gallon Monday, coming in at $4.116 per gallon. The 10-week decline that preceded the Monday increase had sliced 52.4 cents per gallon off the price.
But the reversal came as ultra low sulfur diesel on the CME commodity exchange settled Monday at $2.6147 per gallon, a decline of 2.45 cents per gallon. But more significantly, it marked the second-lowest settlement since Jan. 13, 2022. Only a settlement of $2.6049 on March 15 of this year was lower than where the ULSD market settled Monday.
The decline in diesel prices relative to Brent is beginning to catch the attention of various analysts.
For example, according to Seeking Alpha, Matthew Blair at Tudor Pickering Holt cut its rating on independent refiner Valero (NYSE: VLO), citing lower diesel crack spreads as one reason.
Diesel strength relative to crude can be measured in many ways. One of the easiest and most accessible is a comparison of the front month ULSD price to Brent on the CME.
That spread dropped to less than 60 cents per gallon Friday and moved up only slightly Monday, staying below 60 cents per gallon. In late March, it was approximately 91 cents per gallon. Between March 2022 and the end of March 2023, it was over $1 per gallon for the vast majority of days, climbing as high as $1.60 to $1.70 per gallon, excluding a few times over $2 when the diesel market was being squeezed at the end of a trading month.
That is a roughly 36% decline. In his report, Blair cited another crack spread that he said had declined 23% in the last month.
Meanwhile, the futures price of the gasoline blendstock traded on the CME is now more than the price of ULSD. It has ranged from 15 cents to almost 20 cents per gallon more than diesel in the last five trading days. The last time it had a consistent streak of gasoline trading over ULSD was in August 2021.
A story in Bloomberg published over the weekend highlighted the weakness of the diesel market, citing such markers as the European spread of physical diesel to Brent crude and demand figures in the U.S. that show a significant drop in consumption.
That decline is becoming more stark each Wednesday, when the EIA releases its weekly supply/demand report. Under the category of product supplied, which is a proxy for demand, consumption of distillate, which is about 90% diesel, is 3.829 million barrels per day (b/d) since the start of the year, through the week ended April 7. That number is also impacted by a figure of 4.24 million b/d for the week ended March 31, a number that looks like an aberration or an error.
By contrast, demand for the corresponding period in prior years — January through March plus the first weekly report of April — was 4.197 million b/d in 2022, 3.957 million b/d in 2021, 3.897 million b/d in 2021 (the last two still being impacted by the pandemic), and 4.124 million b/d in 2019.
Energy economist Philip Verleger, who has long cited diesel as an understated driver to the direction of oil markets, wrote in his weekly report Monday that diesel has fallen because “the IMO premium has now vanished.”
His reference is to IMO 2020, the rule implemented by the International Maritime Organization in 2020 that required tighter levels of sulfur in marine fuel. One of the pathways for getting to those targets was to displace heavy fuel that had been used to power ships with a new product called very low sulfur fuel oil, produced largely from vacuum gasoil, an intermediate product that traditionally had been used to make diesel. With the diversion of diesel molecules into the marine fuel market by the shift of some VGO away from making diesel, the diesel premium to crude soared.
Verleger cited several factors in the decline, including the opening of two refineries in China and the concurrent need to increase exports from those new plants “as local demand has stagnated.”
Verleger also cited the decline in ocean freight movements. And even for the ship traffic that is out there, the IMO is also gradually taking steps to require ships to reduce their emissions, which “can be met by slow steaming or the use of green fuels such as methanol. The effect is to cut diesel demand and the drop in prices reflects the change.”
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