by FreightWaves’ John Kingston
The good news for diesel consumers in the global sell-off of commodities and equities Monday is that diesel prices fell further than most other financial assets.
The ultra low sulfur diesel (ULSD) contract on CME settled down 7.28 cents per gallon to $1.6091 per gallon, a drop of 4.32%. Contrast that with the decline in WTI crude (down $1.95 per barrel to $51.43, a decline of 3.79%) or Brent crude (down $2.20 per barrel to $56.30, a decline of 3.76%). RBOB gasoline fell 4.15 cents a gallon to $1.6091 per gallon, a decline of 2.51%.
For ULSD, the settlement actually still stayed above the CME settlements of Feb. 2 and 3, when it settled at a few cents less than $1.60 per gallon. But beyond those two days, the settlement in ULSD Monday was the lowest since an Aug. 23, 2017, settlement of $1.624 a gallon.
In the market for trucking stocks, it was all red, as might be expected. At the close of the day, Knight-Swift (NYSE: KNX) was down 1.47% to $37.77, a decline of $1.47. Schneider (NASDAQ: SNDR) declined 4.49% to $20.65, and Werner (NASDAQ: WERN) declined 2.3% to $37.03, down 87 cents. J.B. Hunt (NASDAQ: JBHT) dropped just under 4% to $105.35, a decline of $4.35.
That compared with a 3.35% drop in the S&P 500. It also should be compared with how some other transportation stocks performed. American Airlines was down 8.52%; UPS was down 4.32%; and FedEx was lower by 5.15%.
Although it was a difficult day for trucking stocks, the team at Deutsche Bank led by Amit Mehrotra was positive for the outlook on equities, assuming a reasonable end to the spread of the virus.
Deutsche said transportation equities are up 2% since the New Year’s Eve start of the coronavirus spread compared to a flat S&P 500. A similar pattern played out with the SARS outbreak in 2003.
The V-shaped recovery that has been mentioned by others was not referred to in the Deutsche report, but it sounded like it in this commentary from the bank: “We observed a notable inflection in freight and industrial economy indicators following containment of SARS- with CASS Shipment, ISM manufacturing, rail & intermodal carloads, and port imports all inflecting meaningfully positively following containment. Equity prices responded to this anticipated inflection, with U.S. Transportation equities rebounding 21% as containment of SARS became increasingly clear (S&P +15%).”
The optimistic outlook was clear in this further commentary from Deutsch: “Based on these observations, market participants appear willing to look past short-term disruptions in output and freight flows while giving nearly full credit to a recovery, implying potential for strong outperformance for U.S. Transportation equities (and broader market) when containment is clear.”
In releasing its Truck Shipper Survey index on Feb. 14, Merrill Lynch laid out how the trucking industry might be impacted by the coronavirus. That was wrapping up a week in which the rate of new infections in China was slowing and the virus had not spread widely outside that country. And while the spread in China continues to slow, the sell-off in markets Monday was mostly driven by the virus’ spread to other countries, the opposite of the situation on Feb. 14.
“The growth impact will depend on the severity of the virus outbreak. If new infections slow sharply by the end of Q1 and Chinese workers return to the factories as encouraged by the central government, China GDP growth is likely to be somewhere between the benign and severe cases,” the Merrill Lynch report stated. “If infections continue to grow significantly into Q2 on a global basis and Chinese workers return to the factories at a very slow pace, the recovery will start later, more supply chains will be disrupted and impact on global growth will be more significant.”
The sell-off in wide classes of financial assets didn’t need a lot of help to head downard, but a report on the coronavirus by Goldman Sachs certainly encapsulated the fears that were driving the market. In one page in particular, quoting various experts, Goldman Sachs reported several statements that the spread of the virus was far from over.
“This virus is going to be very difficult to contain … personally, I don’t think we can do it.” That was from Jeffrey Shaman, an infectious disease researcher from Columbia University. Or from Dr. Nancy Messonnier, of the U.S. Centers for Disease Control and Prevention: “We are not seeing community spread here in the United States yet but it’s very possible — even likely — that it may eventually happen.”
Given this statement from Goldman Sachs, it’s almost surprising that trucking stocks didn’t fare worse. “China is also a hub of global supply chains which could crimp sales and encumber production of US firms,” the Goldman Sachs report said. “Dun and Bradstreet estimates that 163 Fortune 1000 companies have Tier 1 suppliers — those who supply parts that are used directly in the US firms manufacturing process — in the affected areas of China while 938 have Tier 2 suppliers there. Tier 2 firms typically supply parts to the Tier 1 firms that ultimately end up in the final manufactured end product.”
That diesel fell more than crude or gasoline is not surprising. Diesel is a distillate, like jet fuel, and the collapse of aviation traffic and the jet fuel market that went along with it means that a distillate benchmark like ULSD on CME is going to take a big hit. Additionally, diesel is always considered the fuel of commerce — whereas gasoline is more the fuel of personal consumption — so supply chain slowdowns or outright collapses hit diesel more than crude or gasoline.
The decline in diesel is notable when put up against other commodities. For example, the benchmark wheat contract was down 3.12% and corn was lower by 1.18%.
What was also notable about the diesel selloff is that it extended to physical diesel spreads as well. There is a tendency that if the commodity market benchmark moves up or down sharply, spreads will strengthen or weaken, depending on the direction; they don’t always stay steady. But on Monday, according to data from S&P Global Platts, the spread between the dated Brent physical crude benchmark and ULSD for a barge quantity in New York Harbor sank to $11.70 from $12.19 per barrel. In Chicago, the spread between dated Brent and ULSD dropped to $10.62 from $11.64 per barrel.