Diesel futures prices have made a stunning downturn in the past few days as signs of weakening demand in the U.S., rising inventories that have developed as a result and reports of Chinese exports have hit the once high-flying market.
Ultra-low-sulfur diesel on the CME commodity exchange settled Thursday at $3.2052 a gallon, down 17.37 cents on the day. That settlement follows a decline Wednesday of 16.24 cents. The overall drop marks a decline of just over 38 cents since the Sept. 7 settlement of $3.5860 per gallon, a recent high-water mark.
It has occurred at a pace far quicker than declines in the value of crude. For example, since that Sept. 7 price for ULSD, the cost of global crude benchmark Brent has risen to a settlement Wednesday of $94.10 a barrel, up from $88 just six trading days ago. However, the price Thursday dropped back to $90.84.
Wholesale diesel prices track futures moves relatively closely. The ULSDR.USA data series in FreightWaves SONAR reflects that, with the national average wholesale price declining to $3.587 per gallon Thursday from $3.745 a day earlier. That price would not reflect the decline in the futures price recorded Thursday.
Diesel prices have been battered by several news developments. One occurred Wednesday with the release of weekly statistics from the Energy Information Administration.
While some of the data may have been skewed by a downturn in diesel demand a week earlier due to lower trucking activity over the Labor Day weekend — SONAR’s Outbound Tender Volume Index did show a sharp, expected drop — the numbers that traders are looking at were total inventories of both all distillates and ULSD.
Stocks of all distillates for the week ending Friday were 116 million barrels, up sharply from the 111.8 million barrels a week earlier. Meanwhile, inventories of ULSD nationwide rose to just under 106 million barrels, the highest level they’ve been at since February. It also brings inventories up to about 84% of the five-year average for the second week of September. That number had been 80% just a few weeks ago.
The weekly statistics had numerous other data points that gave the diesel bears satisfaction that their view is correct. Refining operations are supposed to begin slowing at this time of year as maintenance programs kick in, but capacity utilization ticked higher. And there were other numbers that suggested it was the desire to make more diesel that was one of the driving factors in that increase, as combined refiner/blender output of ULSD was slightly higher while output of finished motor gasoline declined.
There were other news reports that have helped reverse the trend of rising diesel. A Bloomberg News report said China, which is finding itself with spare capacity as a result of COVID-19 lockdowns in that country, may turn to export markets as an economic stimulus, producing diesel and other products that have seen a decline in demand in the home market. According to Bloomberg, refiners and traders have requested export quotas far above normal levels.
Bloomberg cited that China has been exporting a monthly average of 1.95 million tons of diesel through July. If the higher export quotas are granted, that could rise to 5 million tons for the last three months of the year. Last year’s average was 3.4 million tons, according to the report.
The end result is that not only has diesel fallen on an outright basis, but its spread to crude has weakened significantly. On the Sept. 7 high for ULSD, the spread between front month diesel and front month Brent was just under $1.50 per gallon. It was likely the highest ever except for a day at the end of April when the May contract on CME was being squeezed before expiration.
But after the decline in ULSD on Thursday, and the concurrent increase in Brent, that spread is down to a little more than $1.04.
Even more notable is the spread between front month diesel and for diesel to be delivered in 12 months. That spread is in backwardation, a term that means the price declines as it moves out of the calendar. That is a structure that develops during times of tight inventories — a perfectly balanced market has the price rise over the curve to reflect the cost of storage and the time value of money.
The 12-month backwardation in diesel on CME reached as high as just under $1.22 on June 16. To illustrate how high that is, the average in 2021 was 12 cents.
Yet the 12-month backwardation on CME on Thursday was just under 40 cents. Except for two days in August, that spread had not been less than 40 cents since February. The spread is signaling looser inventories even as data continues to show them tight.
By any measure, diesel inventories are still tight, even with the recent increases in the U.S. For example, in its monthly report released Wednesday, the International Energy Agency said in the developed economies of the Organization for Economic Co-operation and Development (OECD), middle distillate stocks (which includes diesel) declined in August, “reflecting continuing market tensions.” That decline was described as “counter-seasonal,” as they generally increase during August.
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