Just when it looked like retail prices for diesel were going to rise forever, they reversed course for good.
The latest weekly average retail diesel price, released Monday by the Department of Energy’s Energy Information Administration, fell 7.1 cents to $5.0763 a gallon. It’s been the third week in the last four that it’s gone down.
It is now 17.7 cents below its price on March 14, when it was at an all-time high of $5.25 a gallon.
However, the price is still well above where it was before its huge surge, which included a one-week rise of 74.5 cents recorded on March 7th. On February 28, the DOE/EIA price was $4.104 per gallon. First price of the year was $3,613 per gallon.
And the market is set for further declines. The retail-to-wholesale price spread, as measured by the FUELS.USA data series in FreightWaves’ SONAR, was recorded at $1.363 a gallon on Monday. That’s well above the average spread, which tends to range from $1 to $1.05 per gallon, but well below the all-time high set on March 16 when it was $1.711. This is a sign that wholesale prices, which are closely linked to futures prices and physical spot market prices, are falling far faster than retail prices. A return to a more normal spread, even if the diesel spot price does not move, would lower the current retail price significantly.
Futures markets trended significantly lower on Monday. Both benchmark crudes — West Texas Intermediate for North America and Brent for the rest of the world — were below $100 a barrel for the first time since March 16. The drop in the ultra-low sulfur diesel contract to $3.2677 a gallon was a 4.99 cent drop, almost exactly what the contract posted on Friday when it rose 4.98 cents a gallon.
Markets are now closer to their pre-Ukrainian invasion prices than their recent highs. The price of ULSD was $2.8292 per gallon on February 23, the day before the invasion. The highest settlement was $4.1534 on March 24, representing a gain of just over $1.32 per gallon from pre-invasion settlement to the high water mark.
But Monday’s comparison put it at about 88.5 cents below that high price. It is now about 44 cents above final pre-invasion settlement.
Markets are being pushed lower by two key factors. One is the prospect of a prolonged slowdown in China as the nation holds Shanghai, its financial capital, under COVID lockdown, with the looming possibility that other cities like Guangzhou are heading for similar sweeping lockdowns.
A second factor is the increasing reports that the embargo on Russian petroleum exports, be it crude or products, is beginning to leak. As one Fortune article put it, “Russia still manages to sell its oil and gas by lowering prices, instituting financial workarounds and leveraging its position as the world’s largest exporter of such products.”
Bloomberg reported that its analysis of Russian tanker exports showed shipments were about 4 million barrels a day last week and said that figure was up about 25% from the previous week. Russia’s total oil exports are generally around 6 to 7 million barrels a day, but a significant amount of oil reaches Europe via pipelines, so it is not seen in tanker movements. These pipeline supplies have not been disrupted.
Another sign that the oil supply could ease: the structure of the futures curve in the Brent market. The tighter the market, the greater the discount the market gets for oil shipments in a year. This spread, known as backwardation, was over $20 two weeks ago. It is now trending towards $5.50 a barrel, a signal that the market is easing pressure on inventories.
One supply factor that hasn’t started yet is the US release of oil from the Strategic Petroleum Reserve. The first bids for the Biden administration’s plans to release up to 1 million barrels of oil daily for six months are due to be submitted to the Department of Energy on Tuesday, with deliveries scheduled to begin May 12.
There is a chance that interest rates will be less than 1 million barrels per day. However, this should not be taken as a sign that the sale has failed. Rather, it suggests that the market is supplying enough oil, at least for now, and can be taken as a bearish indication.
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