May 16, 2023

Diesel benchmark price falls again but may resist further declines

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Diesel markets beyond the pump price are beginning to reflect inventory levels that in the U.S. at least are starting to head into territory last seen during 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 in the past 15 weeks that the price used for most fuel surcharges has declined. Since that streak began, the price 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 in the futures and physical markets that tight diesel inventories being reported each week by the EIA are starting to impact spot prices in key markets.

According to data supplied by DTN, physical ultra low sulfur diesel (ULSD) differentials have been moving up sharply in the U.S. Midwest, though that strength has not yet shown itself in more widely traded markets such as the U.S. Gulf Coast and New York Harbor.

According 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 in the past five trading days. That spread is the difference between the price of ULSD on the CME commodity exchange and the price for diesel barrels delivered by pipeline in 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 next four trading days of the week, it reached 12.5, 23.5, 22 and 24 cents. On Monday, according to DTN, it dropped to 20 cents.

The Chicago market for ULSD posted similar increases, according to DTN. ULSD in Chicago traded at 2 cents more 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 and then 10 cents a gallon Monday.

There have been numerous reports of particularly strong demand for diesel from the agricultural market; it was mentioned more than once on the recent earnings calls of various refining companies. That sort of demand appears to be showing up in the differentials for Chicago and Group 3, where diesel often feeds agricultural markets.

There are signs the strong Midwest diesel markets are starting to spill into other physical markets. While Gulf Coast differentials to CME have traded narrowly in the past between 2.75 and 4.25 cents a gallon less 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, according to DTN. 

Diesel markets may be reacting to the weekly figures for U.S. inventories of ULSD, which, however they are measured, are tight for this time of year.

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 amount of demand that inventories alone could cover.

That number got as low as 25.4 days in mid-October before rebounding to 32.9 days at the end of 2022. The most recent decline of 1.6 days from the prior week is a significant one-week drop.

That inventories are tightening is not a surprise given that demand figures are largely in line with historical norms for this time of year, with agricultural demand possibly offsetting less buying from the trucking sector.

But gasoline refining margins have been running particularly strong, and some of those same refining executives on the earnings calls said their plants would likely be running “max gasoline” output.

That mix at refineries is leading to reduced diesel output. The EIA reported ULSD output from refiners and blenders for the two 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 is in line 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 most of the last five months of the year. 

A year ago, in April and May of 2022, output was generally around 4.6 million and 4.7 million barrels a day.

Strength in 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 price of ULSD on the CME has mostly trended higher, with a 7.25-cents-per-gallon increase Monday bringing the settlement up to $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 came in at 58.68 cents a gallon Monday, another sign of diesel markets possibly reacting to tightening inventories. 

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