Benchmark Diesel Price Below $4 Again As War-Led Rally Fizzles

A decline of 2.3 cents a gallon from the prior week's number put the Department of Energy/Energy Information Agency price at $3.992. It's only the second time in the past 11 weeks that the price has been below $4. It also now has given back more than half the 21-cents-per-gallon gain recorded Feb. 12, which boosted the price to $4.109 a gallon as Middle East tensions were ramping up.

The decline comes as the fear factor spurred by talk of war between Iran and Israel is making a rapid retreat from the market. 

In crude, after several days of higher oil prices across the board in futures markets earlier this month that led to a significant amount of hand-wringing, those same markets have given back almost all of their gains.

The settlement price for Brent crude, the world's benchmark, was $87.48 a barrel on the final trading day of March. It climbed above $91 four days later and hung around the $90 mark for several days as talk turned to when prices might hit $100.

But with the tit for tat Iranian-Israeli shooting match in the Middle East apparently not taking any lives and possibly having already run its course, Brent settled Monday at $87, $3 under that $90 mark and a long way from $100.

Ultra low sulfur diesel on the CME commodity exchange never spiked percentage-wise as much as Brent. But it got well over $2.70 a gallon earlier in the month. Recent settlements in the $2.53-$2.57 range, however, put it at some of the lowest settlements recorded this year. ULSD settled Monday at $2.5604.

The ultimate price of diesel will depend not only on the price of crude but on how ULSD futures and physical diesel are trading relative to Brent.

The spread between ULSD and Brent on the CME has been on either side of $20 a barrel in recent trading days. It was close to $30 a little more than a month ago.

Spreads in the physical U.S. diesel market are flat to weaker. Those spreads reflect the price of diesel in a spot physical market such as the U.S. Gulf Coast relative to the CME ULSD price.

On the Buckeye Pipeline, which serves Ohio, Pennsylvania and other areas in the Northeast, that spread had ULSD barrels on Buckeye at 9 cents more than the CME price as recently as April 9, according to DTN. On Monday, DTN had that spread at flat.

In Los Angeles on April 9, the spread was 11 cents a gallon. On Monday, according to DTN, it was 3.5 cents.

Another sign of market stability is that what is known as the calendar spread on CME has moved into contango, in which the front-month price — which until April 30 will be for May barrels — is lower than the June price. June is less than July as well. 

That is the inverse of a market structure called backwardation, in which the contract that is closest on the calendar is the most expensive barrel and the price is lower further out the timeline. 

Contango is generally a reflection of a market that is well supplied with healthy inventories; backwardation is the opposite. The move to contango from backwardation in the CME ULSD contract in recent days should be read as a bearish sign.

In its monthly report on distillate markets, which includes diesel, the research firm of Energy Aspects said there is little in the market to propel diesel significantly higher than crude.

The Energy Aspects report noted the move into contango as a sign of "loosening of balances and ample diesel on the water." That also is a cause of the physical spreads weakening, according to the firm's analysis.

One bullish factor that remains in the market is the status of the Russian refining sector after it has been repeatedly attacked by Ukranian drones.

According to a report by Bloomberg, the level of Russian refining is at an 11-month low, partly due to flooding at some plants but also because of the drone attacks.

However, the decline reported by Bloomberg for the week of April 11-17 is only 10,000 barrels a day, so the already reduced levels could be seen as already baked into the price.

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