While the benchmark diesel price, used for most fuel surcharges, fell on Monday, falling for an eighth straight week, oil futures reacted strongly to cuts in shipping companies' use of the Suez Canal, including a major oil company's decision on Monday, the Suez Canal to bypass the Red Sea.
The weekly average retail price of diesel fell to $3.894 per gallon on Monday. That is 9.3 cents less than the previous week. During the eight-week period of unbroken declines, the price of most fuel surcharges fell 65.1 cents.
But the decline didn't just take place during this time. The DOE/EIA price has fallen in 11 of the past 13 weeks, falling 73.9 cents per gallon in that time, compared to the price of $4.633 per gallon on September 18, before this significant series of declines started.
However, market conditions in recent trading suggest that retail prices may have to continue to fall.
Oil markets reacted sharply to news that BP had become the first major oil company to announce it would halt the movement of its tankers through the Red Sea on ships due to attacks by the Iran-backed Houthi movement, which controls much of western Yemen and a significant coastline with the Red Sea.
As with other cargo movements, ships avoiding the Red Sea would no longer travel through the Suez Canal, but would instead go around the Cape of Good Hope in South Africa. Flexport reported last week that the additional shipping time to go around the Cape instead of through the canal would be seven to 10 days.
Reuters reported from the EIA – which in turn cited a company called Vortex – that about 9.2 million barrels of oil per day were transported through the Suez Canal in the first half of this year. With global oil consumption at about 102 to 103 million barrels/day, that would be about 9% of global oil consumption through the key passage that is now under threat.
It is uncertain how quickly retail prices might respond to sharp increases. Retail prices have already moved closer to a more normal range relative to wholesale prices, although market volatility since the start of COVID makes “normal” a relative term.
As of December 8, the FUELS.USA data series in SONAR, which reflects the spread between the average national diesel retail price in the DTS.USA data series and the average national diesel wholesale price as measured in the ULSDR.USA price, has fallen by 21, 3 cents from $1.619 per gallon to $1.406 per gallon. If “normal” is defined as something closer to $1.10 per gallon, it's possible that retail prices will continue to fall, or at least not rise as quickly as the continued rise in wholesale prices driven by the booming futures market for Crude oil and ultra-low prices are caused by sulfur diesel (ULSD).
In the futures market, ULSD on the CME bottomed at $2.5074 per gallon on Tuesday. The trough came after a sharp decline that sent ULSD on the CME down 41.75 cents per gallon between Nov. 21 and Tuesday.
Since then, ULSD has gained 16.54 cents on the CME to settle at $2.6728 a gallon on Monday.
The price increase in the ULSD market comes even as physical indicators show no new signs of tension.
Before the Red Sea troubles, the rise in oil markets could be attributed to several factors, including a falling dollar that slipped as U.S. interest rates fell – oil prices are generally inversely correlated with dollar strength – and the fact that markets do this The price of oil has fallen as much as the price of oil for several weeks and will eventually find at least a temporary bottom as profitable short positions are unwound.
Among the key physical indicators that suggest that the price increase is not related to a new shortage are the spreads in the physical market. These spreads mark the difference between the CME ULSD price and physical barrels of ULSD in barges or in a pipeline.
Some of the spreads have become stronger over the last week; According to DTN, Gulf Coast oil prices rose from minus 40 cents to minus 19.5 cents per gallon. However, the latter price is well below historical norms, so a recovery was almost inevitable.
Meanwhile, the spread in New York Harbor weakened to minus 2.25 cents a gallon from plus 4 cents a week ago. And in Chicago, the range barely changed and was negative 40 cents per gallon.
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