The DOE/EIA weekly retail diesel average rose 17.9 cents/gallon to $5.313/g, a third consecutive increase, while Brent crude settled 8.7% lower on Monday. On a cents-per-gallon basis the gap between ULSD and Brent would exceed $2/gallon, a level with no recent record. Reduced Russian refinery runs and falling Rhine River water levels are adding further tightness to the diesel market.
The benchmark used for most fuel surcharges climbed 17.9 cents/gallon to $5.313/g in the Department of Energy/Energy Information Administration weekly average, effective Monday and published Tuesday. That marks a third consecutive weekly increase, tacking on 73.5 cts/g over that stretch, even as oil prices plummet again.
Retail prices lag, so this week’s figure would not have been expected to reflect the sharp fall in futures that began when trading opened Sunday evening U.S. time. Even after that steep slide, the DOE/EIA average sits at its highest level since just June 8, when it was $5.21/g.
Diesel does not follow crude down
The cessation over the weekend of what had been nightly U.S. attacks on Iran, together with other rumblings of negotiations, led to higher futures market prices the first two days of this week. But for diesel consumers, the more salient development is that the fuel once again did not match the fall in the price of crude.
On Monday, Brent fell $8.42/barrel to settle at $88.36/b, a drop of 8.7% for a contract that had settled above $100 just two days earlier. Ultra low sulfur diesel on the CME commodity exchange, meanwhile, declined 6.9 cts/g to settle at $4.1116/g — a slide of just 1.65%.
A spread with no recent record
Subtract Brent converted to cents per gallon from the ULSD price and the result would exceed $2/gallon — what appears to be a historic new number, with no recent record of it ever occurring. The comparison is far from perfect: the two futures contracts cover different delivery months.
Front month Brent is for September barrels and front month ULSD for August, so that crude cannot turn into diesel delivered next month, yet the relationship still shows how disconnected the two markets have become. On the last trading day before the U.S. and Israel launched their attacks on Iran, the spread was about 87 cts/g. By approximately 11:30 a.m. Tuesday it had widened, with Brent down about 9.7% and ULSD down about 0.2%.
Russian refineries and the Rhine add tightness
A variety of factors feed that ballooning spread, including the general loss of refining capacity in the Middle East from attacks by Iran on facilities in other countries. More recently, two other developments are adding further tightness.
Drone attacks by Ukraine on Russian refineries earlier this month had pushed Russian refinery operations to their lowest processing level in more than 20 years, according to Energy Aspects. Those refineries ran 3.91 million b/d of crude in the first part of July, down 1.4 million b/d from levels of a year ago, according to a report by Bloomberg. Because the physical properties of Russian crude make the country’s refineries major diesel producers, Russia has banned diesel exports.
Water levels on the Rhine River are also falling after a scorching hot summer in Europe, with projections that levels will soon reach their lowest since 1990. That will inhibit fuel shipments and make them more expensive to move on restricted barge usage.
Any diesel consumer watching the price of oil is probably expecting a bigger decline at the pump than what will develop with current trends.
Source: FreightWaves
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