Benchmark diesel price under $4 a gallon for first time in 8 weeks

The benchmark diesel price used for most fuel surcharges moved below the $4-a-gallon mark this week, another sign that for all the developments that seem primed to send prices higher, “balance” appears to be the best word to describe the market for now.

The Department of Energy/Energy Information Administration average retail diesel price fell 3.8 cents per gallon to $3.996 Monday. It is the first time below the $4 mark since Feb. 5.

That early February price was followed by a one-week surge of 21 cents per gallon to $4.109. But since then, prices have been trending lower, and the latest DOE/EIA number puts it 11.3 cents less than that recent high.

The downward trend is continuing even as the drums are mostly beating on the side of market bulls. Most notably, the price of Brent crude, the world’s benchmark, settled Monday at $87.42 a barrel. It was $81.92 on March 12.

Monday’s minor move comes as the futures price for ultra low sulfur diesel (ULSD) on the CME commodity exchange continues to trade in a relatively narrow range, particularly compared to the volatility that has marked oil trade since the pandemic began.

That three-year run was marked by a collapse in prices followed by soaring levels as global economics snapped back into an oil market that had seen global output slide due to COVID-related cutbacks. That was followed by rising crude output from countries including the U.S. that pushed global crude prices down; recent forecasts that prices would bounce back over the $100-a-barrel mark have not come anywhere close to being realized.

Futures prices for ULSD dropped below $2.80 a gallon Feb. 20. In the 29 trading days since then, the high settlement on CME was $2.7882 a gallon, but the the low settlement during that period came on Wednesday at $2.5986. That price from last week was the lowest settlement since Jan. 8.

ULSD on CME has posted two consecutive days of gains since then, settling Monday at $2.6271 a gallon.

Whereas diesel over the past few years often has been a market leader, it is now trailing the rising Brent market by a significant amount. On March 12, the spread between Brent and ULSD was roughly 66 cents a gallon. After Monday’s trading, the spread was down to about 54.7 cents.

Besides the rise in crude, the case for a bullish market, particularly in diesel, is coming primarily from the potential impact of continuing Ukrainian attacks on Russian oil refineries. Given that Russian refineries are configured for a particularly strong diesel yield, that means the bullish case tends to focus on that fuel.

In a report that circulated Monday, Helima Croft, the chief energy analyst at RBC Capital Markets, wrote that RBC believes attacks by Ukraine have affected five refineries that are “facing significant throughput disruptions,” with throughput down 650,000 barrels a day from a year ago.

In her report, Croft also raised the prospect of Ukraine expanding its attacks to Russian facilities that export crude and products such as gasoline and diesel..

Bloomberg reported that Russia plans to reduce its diesel exports to the lowest level in five months because of the impact of the attacks. The reduction will be about 570,000 barrels a day, down about 21% compared to exports of 724,000 barrels a day from the ports last month.

But in what is something of the reverse of that, Mexico, according to Bloomberg, plans to reduce exports of crude to increase refinery processing rates and increase the country’s output of gasoline and diesel.

If Russian refineries are affected by the Ukrainian attacks but crude export facilities are not, that could lead to more crude available for export. The Mexican plan would be the opposite: less crude being exported but more of it to be processed in the country’s refineries.

The Mexican refining sector has long been troubled by inefficiencies. But Bloomberg reported that in February, Mexico’s six refineries “operated near the highest rates seen in more than six years.” The country also has added 340,000 barrels a day of refining capacity with the opening of its Dos Bocas refinery.

In U.S. physical markets, where barrels are traded for physical delivery on barges or on a pipeline, there is no sign of growing tightness.

Those markets are traded as a differential between the physical price in a delivery point such as the U.S. Gulf Coast and the CME ULSD price.

For example, deliveries of ULSD on the Buckeye Pipeline, which services the region including Illinois, Pennsylvania and into New York, the differential for physical barrels was plus 8.5 cents a gallon Monday, according to price reporting service DTN. It has traded near the 7 cents-a-gallon level for several weeks, standing right at 7 on March 12.

Prices for barges in New York Harbor have not moved from plus 1 cent for weeks. In Group 3, a midcontinent area that includes Oklahoma and Kansas, the differential was plus 5.75 cents a gallon Monday, the same price DTN reported on March 15.