Diesel markets have now come pretty much full circle since the Russian invasion of Ukraine, at least at the pump.
The benchmark Department of Energy/Energy Information Administration average weekly retail price fell to $4.098 a gallon Monday, a decline of 0.7 cents a gallon.
With that move, the price is now less than where it was on Feb. 28, 2022. While that price posted a few days after the Feb. 24 invasion, which set off turmoil in oil markets, that market reaction had not yet hit retail diesel prices. The Feb. 28 DOE/EIA price was $4.104 a gallon. A week later, the price climbed 74.5 cents per gallon, and it rose an additional 40.1 cents the following week.
With Russian crude output back close to normal, defying early forecasts that the world might lose as much as 3 million barrels a day of Russian output, retail diesel at least has come back to earth.
The futures price of ultra low sulfur diesel is now less than it was on the last day of trade before the invasion. ULSD on CME settled at $2.8292 a gallon on Feb. 21, 2022. On Monday, it settled at $2.6814 a gallon.
The drop in the DOE/EIA benchmark was the 10th consecutive week the price had fallen. However, it was the smallest drop in that series.
The unanticipated announcement April 2 that the OPEC+ group would cut output by 1 million b/d in May, and hold those cuts in place through the end of the year, continues to be greeted by little reaction following its first upward move. Ultra low sulfur diesel settled March 31, the last trading day before the OPEC+ announcement, at $2.6763 a gallon. On Monday, its settlement was just 0.51 cents per gallon higher.
After weeks and months of changes of several cents per gallon in the DOE/EIA benchmark, the stability in the price of diesel is a welcome occurrence for most parties on both sides of the freight equation.
While some carriers are able to benefit from rapidly declining prices as their fuel surcharge shifts only weekly while retail prices can be going down daily, the stability helps protect independent owner-operators from a market where they need to book a rate that presumably covers diesel prices but without the benefit of a surcharge that helps ensure those costs will be mostly covered.
For shippers, the ups and downs of fuel surcharges or spot rates left the costs of moving their goods to market in uncertain territory that for the past few weeks at least has retreated, to be replaced by a stability they have not seen for quite some time.
If there is a worrisome trend in the market, it remains inventories. U.S. inventories of ultra low sulfur diesel last week were reported at about 83% of their normal level for this time of year. When diesel markets were at their highest level last June and then again in October, that percentage of normal — defined here as the average level of inventories for either the fifth week of March report from the EIA or the first week of Aprll — is based on a comparison of the last seven years. Energy analysts tend to look at a five-year average, but with the pandemic skewing those numbers, FreightWaves made the comparison to seven years.
In his widely read weekly report, energy economist Philip Verleger said as interest rates have been rising, the cost of storage rises in parallel, discouraging the buildup of inventories.
In his report, he said central bankers — raising interest rates to combat inflation — are now more important than some OPEC countries.
Compared to the days of low interest rates, the cost of building up inventories now is “no longer chump change,” Verleger wrote. “As a consequence, refiners and traders will cut inventories. Firms that market petroleum products and other consumer goods will also cut stocks.”
Cost savings will be one of the reasons for the reduction in inventories, Verleger said. A second reason: Banks are tightening their lending.
And the situation is good news for refiners, according to Verleger. “The credit tightening that will prompt refiners and marketers to lower their stocks will boost margins,” he wrote, but it isn’t good news for end users: “Consumers will see higher prices at the pump.”
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