On the back of significant gains in the futures market for ultra low sulfur diesel (ULSD), the benchmark used for most fuel surcharges rose Monday for the first time in 10 weeks.
The weekly Department of Energy/Energy Information Administration average weekly retail diesel price climbed 7.7 cents a gallon to $3.735. That follows nine weeks of declines from a price of $4.061 a gallon on April 6, with the low having been recorded last week at $3.658.
The increase is the largest since a whopping 21-cent rise on Feb. 12.
Prices for ULSD on the CME commodity exchange have staged a sharp reversal after weeks of downward movement. From a recent low of $2.2859 a gallon on June 4, prices have steadily climbed to peak at $2.4868 on Thursday. Monday’s settlement was slightly less than that at $2.4825.
There is no obvious market trend driving prices higher, an increase that has been seen also in the market for global crude benchmark Brent. That price settled at $77.62 a barrel June 4 and settled Monday at $84.25.
Commentary on the recent rise in prices has focused on the sorts of things that analysts often cite when there is not a lot else to explain price movement: an overall rise in asset values as evidenced by the continued gains in equity markets, U.S. jobs data that was stronger than expected but also came out more than 10 days ago, and speculative buying after a long slide in prices that some traders see as having reached a bottom.
Even the dollar/oil price relationship hasn’t been sticking to the script: The dollar is stronger since that June 4 low, which would normally be a bearish factor, yet prices have increased.
One bullish piece of data for diesel can be found in the market for physical barrels. That market represents physical barrels of diesel traded on a barge or pipeline for delivery within a short period of time, measured in days or weeks, at various locations around the country. The diesel is traded as a differential to the CME ULSD price.
According to data from DTN, barrels on the Buckeye Pipeline, which serves the East Coast and parts of Ohio, carried a physical spread for ULSD Monday of minus 7.5 cents a gallon. On June 6, it was minus 29 cents.
The Chicago market recorded similar gains, with a negative 9.5-cents-per-gallon price Monday in sharp contrast to negative 35 cents on June 6.
Smaller strengthening was recorded in the U.S. Gulf Coast market, but in California, the spread has dropped from plus 15 cents a gallon on June 3 to a price even with the CME ULSD price on Monday.
But the most bearish indicator is coming from inventories. ULSD inventories for the week ended June 7 and reported last Wednesday stood at just under 114 million barrels. That’s the highest since February. It’s also just under the 114.6 million barrels reported for the first week of June 2019, before the past few years saw wild swings up and down due to the impact of the pandemic long after it was over.
On the CME, the price of ULSD several weeks ago moved into contango, in which the price of ULSD rises over time. So the August price is higher than the July price (which is the current first month traded), September is higher than August and so on.
Energy economist Philip Verleger, in his weekly report, said conditions are in place to see further building of diesel inventories.
Discussing his data on “returns to storage,” a measure of the financial payoff for putting a commodity in storage and selling it for delivery at a future date, Verleger said the current structure is likely to lead to further inventory increases.
“Diesel fuel is also moving toward surplus,” Verleger wrote. “Firms with working storage capacity can now profitably store diesel even if they pay market interest rates. The incentive is found in excess returns to storage.”
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