Decreases in retail diesel prices at the pump continued this past week, catching up to earlier declines in wholesale and futures prices even as those markets more recently have shown some stability.
The weekly average retail diesel price published by the Department of Energy/Energy Information Administration came in Monday at $4.366 a gallon, a decline of 8.8 cents. It is the fourth week out of the past five that the benchmark price used for most fuel surcharges fell.
Those downward moves are sandwiched around an increase of more than 10 cents per gallon two weeks ago. The net result of the changes in the past five weeks is that the DOE/EIA price is down 22.7 cents from Oct. 2. The price now is at the lowest level it has been since Aug. 7.
Prices at the pump are falling in response to significant moves in future and wholesale prices in mid-October. From an Oct. 13 peak settlement for ultra low sulfur diesel (ULSD) on the CME commodity exchange of $3.2117 a gallon, ULSD then began a slide that eventually took it to a settlement below $3 a gallon on Oct. 30.
Since then, ULSD has settled above $3 a gallon just one day — Thursday — while the last two trading days have seen settlements less than that.
Stability in the market can also be seen in the fact that Monday’s settlement of $2.9524 a gallon was only about 1.4 cents less than where it came in on Oct. 30, suggesting that the relatively large moves in retail prices seen in this week’s benchmark price are reacting to moves from two weeks ago, which is a traditional lag time.
There has not been significant news driving oil markets the past week beyond the lack of the Israel-Hamas conflict spilling into broader oil-producing areas like Iran. That relative stability is being seen by analysts as the primary reason why the price of Brent crude, the world’s benchmark, dropped to a settlement Friday of $84.89 a barrel, down from a post-Hamas invasion peak of $92.38 a barrel on Oct. 19.
As notable as the decline in the outright price of crude has been the narrowing of the forward curve. That curve — the price of delivery of crude or products out along the calendar — is seen as an indicator of inventory levels.
If inventories are tight, the front-month price is the most expensive on the curve, a market structure known as backwardation. The tighter the inventories, the steeper the backwardation.
The 12-month backwardation in Brent stood at almost $9 a barrel — a historically high level — as recently as Oct. 20. But after Monday’s settlement, it was down to $4.47 a barrel, a clear sign that the market is worrying less about supply disruptions.
That narrowing has occurred in the ULSD market as well, though not as dramatically. The 12-month spread in ULSD was almost 90 cents a gallon as recently as Oct. 17 but has been between 71 and 72 cents a gallon the past two trading days.
This is occurring even as the most visible inventory data — the weekly report of the EIA — continues to show tight stocks.
One of the most basic measures of inventory levels reported by the EIA is days cover. It is calculated by taking the estimate of inventories and dividing that by average daily consumption. While the EIA does not produce a days cover figure for ULSD, it does so for distillates, and about 90% of that pool is ULSD.
Days cover for distillates in the latest report for the week ended Oct. 27 was 28.1 days. That was the second consecutive week at that level, and it was the lowest since May. That number had been above 30 days from mid-June through September before slipping under 30 in the week ended Oct. 6.
Inventory levels would have been expected to tighten during that period as refinery maintenance season kicked into high gear. But maintenance generally is wrapped up by early to mid-November, raising the possibility that the average U.S. refinery utilization rate of 85.4% reported in the week ended Oct. 27 will start to rise as the market heads into winter.
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