Diesel markets beyond the pump price are starting to reflect inventory levels that within the U.S. not less than are beginning to head into territory last seen in the course of the price spikes of the spring and fall of 2022.
The Department of Energy/Energy Information Administration weekly average retail diesel price fell 2.5 cents a gallon to $3.897 Monday. It’s the 14th time prior to now 15 weeks that the value used for many fuel surcharges has declined. Since that streak began, the value is down 72.5 cents a gallon from the $4.622-a-gallon level posted by DOE/EIA on Jan. 30.
But there are signs within the futures and physical markets that tight diesel inventories being reported each week by the EIA are beginning to impact spot prices in key markets.
In response to data supplied by DTN, physical ultra low sulfur diesel (ULSD) differentials have been moving up sharply within the U.S. Midwest, though that strength has not yet shown itself in additional widely traded markets resembling the U.S. Gulf Coast and Recent York Harbor.
In response to DTN, the spread for ultra low sulfur diesel in Group 3, an area that encompasses much of the Midwest from Oklahoma up into the Dakotas, has jumped sharply prior to now five trading days. That spread is the difference between the value of ULSD on the CME commodity exchange and the value for diesel barrels delivered by pipeline within the Group 3 region.
On May 1, the spread was 1 cent per gallon. By Monday of last week, it had risen to 10 cents a gallon. Over the following 4 trading days of the week, it reached 12.5, 23.5, 22 and 24 cents. On Monday, based on DTN, it dropped to twenty cents.
The Chicago marketplace for ULSD posted similar increases, based on DTN. ULSD in Chicago traded at 2 cents greater than the CME price on May 1. The market kicked off last week at a 5-cent spread but reached 10, 18, 15 and 13 cents through the week after which 10 cents a gallon Monday.
There have been quite a few reports of particularly strong demand for diesel from the agricultural market; it was mentioned greater than once on the recent earnings calls of assorted refining firms. That form of demand appears to be showing up within the differentials for Chicago and Group 3, where diesel often feeds agricultural markets.
There are signs the strong Midwest diesel markets are beginning to spill into other physical markets. While Gulf Coast differentials to CME have traded narrowly prior to now between 2.75 and 4.25 cents a gallon lower than the CME price, ULSD on the Buckeye Pipeline system, which extends into various Northeast markets, has moved up from 7.5 cents a gallon over the CME ULSD price on May 5 to hit plus-22 cents a gallon just three days later. It closed Monday at plus-14.5 cents, based on DTN.
Diesel markets could also be reacting to the weekly figures for U.S. inventories of ULSD, which, nonetheless they’re measured, are tight for this time of yr.
Last week’s inventory report from the EIA, for the week ended May 5, reported that days’ cover of all nonjet distillates — which generally are about 88% to 90% ULSD — dropped to 27.6 days. Days cover represents the quantity of demand that inventories alone could cover.
That number got as little as 25.4 days in mid-October before rebounding to 32.9 days at the top of 2022. Probably the most recent decline of 1.6 days from the prior week is a major one-week drop.
That inventories are tightening isn’t a surprise on condition that demand figures are largely consistent with historical norms for this time of yr, with agricultural demand possibly offsetting less buying from the trucking sector.
But gasoline refining margins have been running particularly strong, and a few of those self same refining executives on the earnings calls said their plants would likely be running “max gasoline” output.
That blend at refineries is resulting in reduced diesel output. The EIA reported ULSD output from refiners and blenders for the 2 weeks ended April 28 and May 5, respectively, of 4.4 million and 4.46 million barrels a day.
One thing that isn’t occurring is lower refinery operating rates; last week’s national rate was 91%, a figure that’s consistent with historic levels for early May. But with that “max gasoline” output, ULSD output the past several weeks has been stuck between 4.3 million and 4.5 million barrels a day. Last fall, when diesel prices were strong enough to post retail numbers near $5.75 a gallon, refiners and blenders were producing as much as 5 million barrels per day some weeks and were consistently between 4.8 million and 5 million for many of the last five months of the yr.
A yr ago, in April and May of 2022, output was generally around 4.6 million and 4.7 million barrels a day.
Strength within the diesel market has also been evident in futures prices on the CME the past several days. After bottoming out at $2.2323 a gallon on May 3, the value of ULSD on the CME has mostly trended higher, with a 7.25-cents-per-gallon increase Monday bringing the settlement as much as $2.378 a gallon.
Its spread against global benchmark Brent crude also has widened, signaling that diesel is moving up at a stronger rate than recent increases in crude. The spread between front-month Brent and ULSD was 49.4 cents a gallon on May 1. But that number got here in at 58.68 cents a gallon Monday, one other sign of diesel markets possibly reacting to tightening inventories.
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