Macro
Diesel prices drop to $3.789 per gallon, lowest since July, marking a 6-week consecutive decline.
The U.S. retail diesel market has seen a significant decline, with the Department of Energy/Energy Information Administration (DOE/EIA) reporting a drop of 5.9 cents per gallon, bringing the average price to $3.789. This marks the lowest level since July 3, 2023, when prices were at $3.767 per gallon. The current price is also 84.4 cents lower than the recent high of $4.633 per gallon recorded on September 18. This decline represents the sixth consecutive weekly drop in diesel prices.
Futures prices for ultra-low sulfur diesel (ULSD) on the CME commodity exchange have also decreased, settling at $2.4871 per gallon, down about 17 cents since April 15. However, the retail price has fallen more sharply, by approximately 23 cents per gallon. This discrepancy can be attributed to the lag in retail price adjustments and the continued weakness in physical diesel prices, which are declining faster than futures prices. In key markets like the U.S. Gulf Coast and New York Harbor, physical diesel prices have remained relatively flat, while other regions such as the Buckeye Pipeline system and Chicago have seen significant negative spreads between physical barrels and CME ULSD.
Crude oil prices have shown little movement this month, with Brent crude settling at $83.71 per barrel on Monday, slightly up from $83.44 on May 1. The highest settlement this month was $83.88 per barrel on May 9, and the lowest was $82.38 on Wednesday. The price differential between ULSD and Brent crude has remained in a tight range of $19 to $20.50 per barrel since the start of May, compared to an average spread of $24.30 per barrel in March and April.
The front structure of the ULSD market on CME has shifted into contango, where the second-month price is higher than the first-month price. This structure typically incentivizes building inventories, but U.S. inventories of ULSD have remained stable, ranging between 106 million and 108 million barrels since early March. Energy economist Philip Verleger noted that global stocks of petroleum products are contributing to downward pressure on prices, with high interest rates preventing significant stock building.
Geopolitical tensions have also played a role in the oil market. Over the weekend, Ukraine conducted drone attacks on Russia's Slavyansk oil refinery, forcing the facility to halt operations. The refinery processes approximately 80,000 barrels per day and has been a repeated target of attacks. The U.S. has expressed concerns over these strikes, with Defense Secretary Lloyd Austin highlighting the potential impact on the global energy situation.
Additionally, an oil tanker was struck by a missile off the coast of Yemen, near the Bab el-Mandeb strait. The Panama-flagged crude oil tanker sustained slight damage but continued to its next port of call with the crew safe. The Iran-backed Houthi militants have intensified their attacks on warships and merchant vessels in the Red Sea, disrupting a crucial global shipping route and forcing vessels to take longer routes around southern Africa.
"Data on product inventories indicate a well-supplied market... High interest rates prevent stock building. The historical data on product market behavior, given the inventory situation, indicate that product prices will likely weaken relative to crude and thus will not be creating upward pressure on the latter."
"Increased diesel exports from the Middle East to Europe will also limit upward pressure on refining margins."
"A product surplus pervades the Asia-Pacific market, leaving margins across the region very low."