The benchmark diesel price used for most fuel surcharges has increased by a further 14 cents

The increase in diesel prices since July 3 is now 36.1 cts/g. (Photo: Jim Allen/FreightWaves)

The reference price, which serves as the basis for most fuel surcharges, continued to rise on Monday, even as the strong uptrend in diesel futures and wholesale prices took a breather for at least a few days.

The Department of Energy/Energy Information Administration price rose 13.9 cents per gallon to $4,378. This is the highest level since February 21. With the price increasing five of the last six weeks and the sixth week flat, the DOE/EIA diesel price is up 36.1 cents per gallon since July 3rd.

Coincidentally, July 3rd is the date of the most recent market bottom in the price of ultra-low sulfur diesel on the CME commodity exchange.

The price that day was $2.3773 a gallon. This was followed by a series of 17 daily increases over the next 21 days. The recent gains saw the ULSD price on the CME peak at $3.207 a gallon on Wednesday, but has since slipped back down to Monday’s level of $3.0883 for an overall gain of about 71 cents since the July 3rd low.

With this increase in futures prices, wholesale prices generally increase with high correlation. But even with increases in retail prices reflected in the DOE/EIA price, the price at the pump continues to lag gains in the wholesale and futures markets significantly.

This is most evident on the FUELS.USA page in FreightWaves’ SONAR. On July 18, the price was $1.204 a gallon before plunging to 87.4 cents a gallon on Thursday as retailers failed to keep up with soaring wholesale and futures markets. Due to the cooldown in these latter markets over the past few days, and as retailers continued to hike prices to reflect previously higher prices, FUELS.USA’s nationwide range widened to $1.011 a gallon on Sunday.

The rise in oil markets in general has been fueled by a tightening supply-demand balance outlined by the International Energy Agency in its August report last week.

Additionally, it is particularly notable that diesel prices have risen far more than crude oil prices, due in part to tight inventories around the world. The ULSD price in the futures market moved to a premium of more than $40 per barrel in late July and early August, the first time in this range since the days before the Russian invasion of Ukraine.

The story goes on

In his weekly report, energy economist Philip Verleger, who has long focused on diesel as a more powerful driver of oil prices than is widely believed, drew on a 1986 magazine article that highlighted a sign in an office of a major oil company. The sign said KILL and it stood for “Keep Inventory Low and Lean”.

Looking at the current market, Verleger wrote, “KILL is back with a vengeance.”

“Inventories are low in 2023 for the same reason they were in 1996,” Verleger wrote, citing another year of tight inventories and rising prices. “Markets are in backwardation. With backwardation, the refiners’ customers – marketers – will do whatever they can to limit their inventories.”

(Below is an example of a New York Times headline from this period.)

Backwardation is a market condition where the price of a commodity for future deliveries decreases as the calendar advances. The ULSD settlement amount on Monday was $3.0883 per gallon for ULSD shipped in September in New York Harbor. The October price settled at $3.0682 per gallon.

Since prices with a later delivery date are lower than the current price in a market backwardation, it is not advisable to build up inventories. Once a keg available today enters inventory, its value decreases in market backwardation.

The backwardation of diesel has intensified particularly sharply in the past few days. Looking at the range between the first month ULSD and the price 12 months from now, it settled at a range of 4.51 cents on July 3rd. However, as diesel stocks tightened, that spread began to break out, hitting a whopping 49.07 cents a gallon on Wednesday.

But just as the front-month price of ULSD has declined over the past few days, so has the spread between the front-month and 12-month ULSD. The price settled at 15.66 cents a gallon on Friday and was slightly higher at 18.21 cents on Monday.

how does this end If backwardation hampers inventory building, how can a market ever build the inventory it needs?

It generally occurs when refineries can make such large margins on the production of diesel that they end up producing more of it than the market needs, and backwardation or no, the fuel ends up in storage.

But Verleger’s report doesn’t anticipate that happening any time soon. He notes that through the spin-offs of refining units by ConocoPhillips and Marathon Oil over the years, the US refinery has moved away from integrated companies and created new independent refineries. “The changed market structure, where the big refiners are independent from supermajors like ExxonMobil and Shell, and the marketers and distributors are equally independent, creates a situation where everyone has good reasons to minimize inventories when futures markets don’t give signals to stockpile give.” And these signals are currently pointing in the other direction.

Another factor behind the rise in diesel prices is that Wall Street investors have concluded that they think diesel is a good investment.

Reuters chief energy correspondent John Kemp reviewed data from the US Commodity Futures Trading Commission and said fund managers had bought more diesel futures positions than sold in 12 of the last 14 weeks.

“[Diesel] “Inventories have failed to recover significantly from their mid-2022 cyclical lows and there is not enough spare refining capacity to readily replenish them,” Kemp wrote on Monday. “As a result, dealers are increasingly assuming that a soft landing in the US economy and a resurgence in manufacturing and freight activity will quickly lead to renewed diesel shortages.”

More items from John Kingston

How a city curbs overweight trucks

First look at Pilot’s finances after Berkshire Hathaway ownership has grown

After declines and corrections, US truck jobs are now below October 2022 levels

The benchmark diesel price used for most fuel surcharges is up a further 14 cents and appeared first on FreightWaves.