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DOE/EIA diesel price nears pre-Ukraine-invasion level with latest drop

Even as the benchmark Department of Energy/Energy Information Administration diesel price continued to edge toward where it was before Russia invaded Ukraine, some bullish developments combined to send oil futures prices higher Monday.

The DOE/EIA diesel price fell 5.7 cents a gallon to $4.128, effective Monday. It is the eighth consecutive week that the number used for most fuel surcharges has declined, and the 17th week of the past 20.

On Feb. 28, 2022, just four days after Russia invaded Ukraine, the DOE/EIA price was set at $4.104 a gallon, just 2.4 cents less than Monday’s price. Although futures and wholesale markets had reacted quickly to the invasion, and in fact had been rising already, that Feb. 28 average retail price would not have reflected the invasion, simply because retail markets, up or down, take time to react to sharp changes in wholesale and futures prices.

The $4.104-a-gallon level can then be seen as the last pre-invasion price, even though technically it was posted after the invasion. And with the run of declines that have taken the DOE/EIA diesel price down from a high of $5.81 a gallon on June 20, the price of diesel at the pump has given up virtually all of its post-invasion gains. 

Diesel futures prices last week were the quietest they have been in months. After settling March 17 at $2.6787 a gallon, the price of ultra low sulfur diesel (ULSD) moved as high as $2.7403 Wednesday before falling back to close the week at $2.6952 a gallon, a move over the course of the week of not even 2 cents.

But that quiet ended Monday in oil futures markets. With markets propelled by several factors, the price of ULSD climbed 2.71% to $2.7704 a gallon, an increase of 7.52 cents a gallon from Friday. It’s the highest settlement since March 10.

Gains in ULSD actually trailed other key petroleum contracts. West Texas Intermediate rose 3.55%, and international crude benchmark Brent was up 4.17%. For Brent, the settlement of $78.12 a barrel is the highest settlement since March 13.

On the bullish side, the most immediate cause behind the increase was said to be market reaction to news that the Iraqi government and officials from the semiautonomous Kurdish region had failed to come to agreement on exports of about 400,000 barrels a day of crude from the Turkish port of Ceyhan, resulting in a halt to the pipeline flows that take oil to Ceyhan for export out of the Mediterranean.

That oil needs to transit through Kurdistan, whether it is produced in the Kurdish region or in the rest of Iraq, before entering Turkey for export.

At the core of the issue is a long-running dispute between the Baghdad government and the Kurds over control of oil production and exports. 

News reports quoted operators in the Kurdish region saying that while they were able to put oil into storage for now, they will run out of space relatively soon and will need to shut in production if the dispute is not resolved.

Another bullish factor, particularly for diesel, has been the continuing strikes in France due to turmoil over changes in the country’s pension system. 

Argus Media reported that shutdowns at French refineries because of the strikes are now totaling 900,000 barrels a day, or almost 1% of global world demand.

The loss of diesel output from the French refineries is not yet showing up in U.S. market differentials. Given the amount of diesel trade between the U.S. and Europe, tighter diesel markets would be expected to be visible in the spread between the CME price and physical barrels in regional markets.

But according to DTN Energy, the spread between the CME price and the price of barge quantities of ULSD in New York Harbor remains moderate. It was assessed by DTN 0.75 cents a gallon the past three trading days and was 0.5 cents a gallon for a day prior to that. A week ago, it was 2.5 cents per gallon, so the spread has actually weakened.

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