Diesel markets have turned sharply in the futures and wholesale markets since the beginning of the year, and the threat of a ban on imports of Russian diesel from the European Union on February 5 is believed to be the main reason.
But for now, US pump prices are still catching up on the decline in forward and wholesale prices that ended 2022. As a result, the Department of Energy/Energy Information Administration’s average retail diesel price fell this week, despite an increase of nearly 28 cents a gallon since a recent low on Jan. 4.
Released Tuesday rather than the usual Monday due to Martin Luther King Jr. Day observance, the EIA posted a price of $4.524 a gallon, down 2.5 cents from last week. This price is the basis for most fuel surcharges.
While the price of ultra-low-sulfur diesel on the CME fell just 49 cents a gallon on Tuesday, it was the futures price’s first fall since Jan. 4, when it settled at $2.9719 a gallon. Settlement had risen for seven consecutive days before Tuesday’s decline.
But with the upcoming Russian diesel ban, what is more important and revealing about the strength of the diesel market is how the fuel is performing versus crude oil and the strength of its spread versus the futures price in the physical markets. That would suggest whether diesel is strengthening on its own or just benefiting from the rise in crude oil prices, which are up more than $8 a barrel from the January 4th low.
A head-to-head comparison of Brent crude to ULSD at CME showed some strengthening, but gains that have already moderated from a recent high.
This spread opened the year at just over $1.13 a gallon. Since then, the trend has been up, with a spike above $1.31 a gallon on January 10th. But since then, the Brent/ULSD spread has tightened, coming in at just above $1.19 a gallon on Tuesday.
Spreads on the physical markets are also showing no signs of tightening.
On physical cash markets, trading is conducted as a spread versus the front month CME ULSD price. So Tuesday’s trading would have been a difference to the ULSD in February, the front month on the CME.
According to DTN, the spread for the spot ULSD difference in the Port of New York on Tuesday was 4 cents, meaning barge volumes of ULSD were trading 4 cents more than February ULSD on CME. Last Friday the spread closed the week at 6 cents. In 2023 it was constantly between 3.75 and 7.5 cents per day.
Most analyzes of the Russian diesel ban see an eventual reorganization of the supply lines. Russian diesel exports to the EU – estimated at 700,000 barrels a day this year, according to a Reuters report by oil analysis firm Vortexa – will need to find a new home in other parts of the world. Those countries that source more or new supplies of Russian diesel would then source less from other suppliers or export more from their own diesel production.
Ultimately, the new trade relationship should allow current Russian diesel exports to the EU to find new homes and supplies would normalize. But the shipping cost would increase as the efficiency decreases. The question is whether this translates into higher costs for end-users, or if Russia ultimately eats up those higher costs in lower netbacks, which is widely believed to be what is currently happening in the crude oil market.
The other question is how long it will take and what will happen to the markets in the meantime. Spreads on the physical market and versus crude oil are showing no reaction for now, suggesting the market will tighten in anticipation of the ban on Russian imports to the EU.
Energy market research firm HFI Research recently wrote about the rebalancing of Russian crude oil exports, noting that data suggests they have not fallen below pre-war levels and have risen significantly in recent months, albeit for a very different set of buyers.
“On paper, one would think that Russian crude oil exports should have declined by now given the EU sanctions ban that begins in December, but January data contradicts that,” HFI wrote in a research note. “Could this be just another push for product ban? Maybe, but the data are far too uncertain to draw any definitive conclusions.”
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