The growing strength of diesel fuel relative to crude is beginning to draw significant attention in oil markets, even as there is evidence the past few days that the widening spread between the two may be taking a breather.
The benchmark Department of Energy/Energy Information Administration average retail diesel price fell 0.7 cents/gallon Monday, posted Tuesday, to $3.805/g. It’s the first decline after three weeks of increases, and only the second decline in the last eight weeks.
Ultra low sulfur diesel (ULSD) on the CME commodity exchange settled Monday at $2.4266/g, down from a week-earlier settlement of $2.5092/g.
Measuring the diesel futures market on a straight comparison of the front month price (some comparisons make other adjustments) shows just how strong diesel has been compared to crude.
On June 11, crude made a significant upward move, with the West Texas Intermediate price on the CME commodity exchange rising 3.17% to settle at $68.15/barrel, and worldwide benchmark Brent rising 2.9% to settle at $69.77. Ultra low sulfur diesel (ULSD) on that day settled at $2.2053/gallon.
Since then, based on Monday’s CME settlements, WTI is down 2.11%, settling Monday at $66.71. But ULSD is up just over 10%, settling Monday at $2.4266/g.
Diesel isn’t just strong against crude. RBOB gasoline, an intermediate gasoline blendstock that is the proxy for gasoline prices on CME, is now about 30 cts/g less than ULSD. The spread got as wide as 37 cts/g last week. But RBOB was at a small premium to ULSD as recently as late May.
John Kemp, a long-time journalist who writes about energy and is now independent, described diesel recently as “the lone bright spot in an otherwise despondent oil market.”
In a distributed email, Kemp said data on investment in oil futures showed that investors have “continued to boost their bullish position in middle distillates while selling the rest of the petroleum complex” in the week ended July 25.
“Investors expect low diesel inventories to support prices and crack spreads even if the rest of the complex comes under pressure from rapid production increases by Saudi Arabia and its OPEC⁺ partners,” he wrote.
Open interest in ULSD on both the CME and the Intercontinental Exchange (ICE), which reflects investor activity, were high enough on a combined basis to be in the 85th percentile all-time, Kemp wrote.
In an article late last week, Bloomberg said a report published by Goldman Sachs said that while the recent margins of diesel against Brent may slow, the investment bank said they “are still likely to end up above long-run averages given a crunch in global processing capacity.”