For the 16th time in 17 weeks, the benchmark price used for most 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 is now down 73.9 cents from the $4.622-per-gallon price it stood at before beginning the recent run of declines. The DOE/EIA price also stands at its lowest level since Jan. 31 of last year, when it was $3.846 a gallon. 

This week’s decline of 1.4 cents is the smallest in the past five weeks of lower prices. The five-week run started after the one time in those past 17 weeks when the price recorded an increase, rising 1.8 cents to $4.116 a gallon on April 17.

The continuing decline in U.S. diesel inventories is not generating the expected reaction in futures markets, even though those sliding stock numbers are significant.

Ultra low sulfur diesel on the CME commodity exchange settled Monday at $2.3664 a gallon, down a little more than 1 cent in the past week. 

But in the interim during that week, the EIA reported Wednesday that in 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 pretty much right where they were a year ago for the second week of May, when they stood at 95.2 million barrels. But a year ago, on May 23, the DOE/EIA average retail diesel price was $5.571 a gallon, a far different number than the current figure.

Stocks therefore were tight a year ago and they are tight again now but with a vastly different price. Given that tight inventories helped drive up diesel prices a year ago, this year’s figures should raise some concern about diesel markets.

In 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 do not show traders appear all that worried. 

The spread between ULSD and Brent crude on CME  was about 55.7 cents a gallon at 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 largely tracking moves in crude after declining between March and April, not a sign of a market worried about tight diesel supplies.

A monthly report from Energy Aspects, a consulting firm, suggested that diesel inventories are likely to stay tight. 

Part of the issue now impacting those diesel stocks is that refiners want to make as much gasoline as possible now, given how profitable it is. 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 just below 84 cents.

While refinery runs have been strong in the U.S. at about 92% of capacity in the latest weekly EIA report, diesel output has been lower because of the shift to gasoline. Diesel output did rebound in the report for the week ended May 12.

U.S. stocks of ultra low sulfur #diesel dropped again last week, according to EIA. One reason is that even though refinery runs are healthy at 92%, they’re making lots of #gasoline and less diesel than usual for this time of year (though output was up 127k b/d from prior week). pic.twitter.com/A4C4owDiGS

— John Kingston (@JohnHKingston) May 18, 2023

In its monthly report on the market for middle distillates, Energy Aspects 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 is also tightening Atlantic basin balances, with our revised forecast indicating the US will be able to maintain exports or build domestic [diesel] stocks, but not both,” Energy Aspects said.

Even with new capacity 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 new distillate-oriented refinery capacity.”

Energy Aspects sees the diesel market tightening because the need for barrels to stay in the U.S. to meet domestic needs means the price must 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 at this time on the calendar. “The U.S. would need to price highly to keep barrels at home in order to prevent draws to new historical lows,” EA said in its report.

Another constraint on building inventories: interest rates. Putting inventories into storage ties up capital, and the cost of that capital is higher than it has been.

In his weekly report, energy economist Philip Verleger said his research has concluded that interest rate increases from central banks will lead to a significant reduction in inventories in the Western nations of the Organization for Economic Cooperation and Development of between 100 million and 200 million barrels of crude. That sort of reduction would presumably spill over into diesel markets as well.

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