The benchmark price used as the premise for many fuel surcharges continued to barrel ahead Monday, whilst the strong upward trend in diesel futures and wholesale prices has taken a breather for not less than just a few days.
The Department of Energy/Energy Information Administration price rose 13.9 cents a gallon to $4.378. It’s the very best level since Feb. 21. With gains in the worth in five of the past six weeks, and that sixth week recording no change in the worth, the DOE/EIA diesel price is up 36.1 cents a gallon since July 3.
Coincidentally, July 3 is the date of essentially the most recent market low in the worth of ultra low sulfur diesel on the CME commodity exchange.
It settled that day at $2.3773 a gallon. It then set off on a run of 17 every day increases out of the following 21 days. Recent gains took the worth of ULSD on the CME to a high settlement of $3.207 a gallon Wednesday, but it surely has since slid back to a settlement of $3.0883 Monday, for an overall gain of about 71 cents for the reason that July 3 low.
With that gain in futures prices, wholesale prices generally move up at a high correlation. But even with the increases in retail prices as evidenced within the DOE/EIA price, the worth on the pump continues to lag gains in wholesale and futures markets by a big margin.
That’s most apparent within the FUELS.USA spread in FreightWaves’ SONAR. It stood at $1.204 a gallon on July 18 before plunging to 87.4 cents a gallon on Thursday, as retailers did not sustain with the blistering pace of increases within the wholesale and futures markets. With the cooling of those latter markets the past few days, and with retailers continuing to place through increases to reflect the sooner higher prices, the national spread in FUELS.USA increased to $1.011 a gallon on Sunday.
![](https://www.freightwaves.com/wp-content/uploads/2023/08/14/fuels-aug-14-1200x439.jpg)
The surge in oil markets basically has been driven by a tightening supply/demand balance that the International Energy Agency spelled out in its August report last week.
What has been particularly notable on top of that’s that diesel prices have surged at a rate far higher than that of crude, propelled partly by tight inventories world wide. The value of ULSD on the futures market moved to a premium of greater than $40 a barrel toward the top of July and the primary days of August, the primary time at that spread for the reason that days leading as much as Russia’s invasion of Ukraine.
In his weekly report, energy economist Philip Verleger, who has long focused on diesel as a more impactful driver of oil prices than it generally gets credit for, reached back to a magazine article from 1986 that highlighted a check in a serious oil company office. The sign said KILL, and it stood for “Keep Inventories Low and Lean.”
Taking a look at the present market, Verleger wrote, “KILL is back with a vengeance.”
“Inventories are low in 2023 for a similar reason they were low in 1996,” Verleger wrote, citing one other yr of tight inventories and rising prices. “Markets are in backwardation. With backwardation, the purchasers of refiners — marketers — will do every part they will to limit their stocks.”
(Below is an example of a Latest York Times headline from that period.)
![](https://www.freightwaves.com/wp-content/uploads/2023/08/14/times-head.jpg)
Backwardation is a market condition during which the worth of a commodity for future delivery is lower because the calendar moves forward. The united states settlement Monday was $3.0883 a gallon for ULSD delivered in Latest York Harbor in September. The value for October settled at $3.0682 a gallon.
Because prices with a further-out delivery date are lower than the present price in a market backwardation, it discourages constructing inventories. As soon as a barrel available today is put in inventory, its value declines in a market backwardation.
The backwardation in diesel has gotten particularly severe in recent days. Taking a look at the spread between front-month ULSD and the worth 12 months out, on July 3 it settled at a 4.51-cent spread. Nonetheless, as diesel inventories tightened, that spread began to blow out, reaching a whopping 49.07 cents a gallon Wednesday.
But in the identical way that the front-month price of ULSD has dropped the past few days, so has the spread between front-month and 12-month ULSD. It settled Friday at 15.66 cents a gallon and was barely wider Monday at 18.21 cents.
How does that end? If a backwardation discourages inventory constructing, how does a market ever construct the stocks it needs?
It generally happens when refiners could make such huge margins on making diesel that they find yourself producing more of it than the market needs, and backwardation or not, the fuel results in storage.
But Verleger’s report doesn’t see that occuring anytime soon. He notes that refining within the U.S. has moved away from integrated firms with the spinoff of refining units over time by ConocoPhillips and Marathon Oil, creating latest independent refiners. “The market’s altered structure, where the most important refiners are independent of supermajors reminiscent of ExxonMobil and Shell and the marketers and distributors are equally independent, creates a situation where everyone has good reason to attenuate inventories absent futures market signals to construct stocks.” And people signals are pointing the opposite way at present.
One other think about the surge in diesel prices: Wall Street investors have decided they think diesel is a very good investment.
Reuters chief energy correspondent John Kemp, reviewing data from the U.S. Commodity Futures Trading Commission, said fund managers have bought more diesel futures position than they sold in 12 of the past 14 weeks.
“[Diesel] inventories have did not rebound significantly from their cyclical lows in the course of 2022, and there just isn’t enough spare refining capability to spice up them readily,” Kemp wrote Monday. “In consequence, traders increasingly expect that a soft landing for the U.S. economy and resurgence of producing and freight activity will quickly result in diesel shortages re-emerging.”
How 1 city is curbing obese trucks
1st peek at Pilot’s funds after Berkshire Hathaway ownership grows
After declines and revisions, US truck jobs now below October 2022 level
The post Benchmark diesel price used for many fuel surcharges up one other 14 cents appeared first on FreightWaves.