For the sixteenth time in 17 weeks, the benchmark price used for many diesel fuel surcharges declined Monday.
The Department of Energy/Energy Information Administration average weekly retail diesel price declined 1.4 cents a gallon to $3.883. It’s now down 73.9 cents from the $4.622-per-gallon price it stood at before starting the recent run of declines. The DOE/EIA price also stands at its lowest level since Jan. 31 of last yr, when it was $3.846 a gallon.
This week’s decline of 1.4 cents is the smallest up to now five weeks of lower prices. The five-week run began after the one time in those past 17 weeks when the value recorded a rise, rising 1.8 cents to $4.116 a gallon on April 17.
The continuing decline in U.S. diesel inventories isn’t generating the expected response in futures markets, despite the fact that those sliding stock numbers are significant.
Ultra low sulfur diesel on the CME commodity exchange settled Monday at $2.3664 a gallon, down a bit of greater than 1 cent up to now week.
But within the interim during that week, the EIA reported Wednesday that within the week ended May 12, ULSD inventories were 95.6 million barrels.
The irony is that at 95.6 million barrels, U.S. inventories of ultra low sulfur diesel are just about right where they were a yr ago for the second week of May, once they stood at 95.2 million barrels. But a yr ago, on May 23, the DOE/EIA average retail diesel price was $5.571 a gallon, a far different number than the present figure.
Stocks subsequently were tight a yr ago they usually are tight again now but with a vastly different price. Provided that tight inventories helped drive up diesel prices a yr ago, this yr’s figures should raise some concern about diesel markets.
Within the second week of May in 2021, ULSD inventories were 120.6 million barrels. Skipping the distorted numbers from 2020 when refiners were shifting their reduced level of runs away from gasoline and over to diesel, stocks in 2019’s second week of May were 112.2 million barrels, compared with 102 million barrels in 2018 and 130.8 million in 2017.
But despite the inventory squeeze, other market indicators don’t show traders appear all that nervous.
The spread between ULSD and Brent crude on CME was about 55.7 cents a gallon on the Monday settlement. A month ago, it was just over 56 cents a gallon. In mid-March, it got as high as about 95 cents. ULSD is essentially tracking moves in crude after declining between March and April, not an indication of a market nervous about tight diesel supplies.
A monthly report from Energy Features, a consulting firm, suggested that diesel inventories are more likely to stay tight.
A part of the problem now impacting those diesel stocks is that refiners have the desire to make as much gasoline as possible now, given how profitable it’s. On May 8, the front-month spread between Brent and RBOB gasoline, a semi-finished gasoline product, was about 62.8 cents a gallon on CME. On Monday, that spread finished slightly below 84 cents.
While refinery runs have been strong within the U.S. at about 92% of capability in the most recent weekly EIA report, diesel output has been lower due to the shift to gasoline. Diesel output did rebound within the report for the week ended May 12.
In its monthly report in the marketplace for middle distillates, Energy Features said the firm is “constructive” on the spread between crude and diesel, an analyst term for “It’s going to go up.”
“The yield shift into gasoline can be tightening Atlantic basin balances, with our revised forecast indicating the US will have the opportunity to keep up exports or construct domestic [diesel] stocks, but not each,” Energy Features said.
Even with recent capability to make diesel online at ExxonMobil’s refinery in Beaumont, Texas, the push by refiners to make more gasoline “is limiting US supply growth despite recent distillate-oriented refinery capability.”
Energy Features sees the diesel market tightening because the necessity for barrels to remain within the U.S. to satisfy domestic needs means the value should be high enough to discourage exports of ULSD, which at recent levels of about 1.2 million barrels a day are relatively higher than in prior years presently on the calendar. “The U.S. would want to cost highly to maintain barrels at home with the intention to prevent draws to recent historical lows,” EA said in its report.
One other constraint on constructing inventories: rates of interest. Putting inventories into storage ties up capital, and the price of that capital is higher than it has been.
In his weekly report, energy economist Philip Verleger said his research has concluded that rate of interest increases from central banks will result in a big reduction in inventories within the Western nations of the Organization for Economic Cooperation and Development of between 100 million and 200 million barrels of crude. That form of reduction would presumably spill over into diesel markets as well.
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