The Department of Energy/Energy Information Administration (DOE/EIA) average weekly retail diesel price climbed 17.9 cents/gallon to $5.313/g, effective Monday but published Tuesday, marking a third consecutive weekly increase and a total gain of 73.5 cents/g over that period, according to FreightWaves. The latest price is the highest since June 8 when it was $5.21/g and just under the April 27 level of $5.351/g.
Retail Diesel Price Rises Despite Crude Plunge
Despite the steep rise in retail diesel, oil futures have fallen sharply. On Monday, the price of world crude benchmark Brent fell $8.42/barrel, settling at $88.36/b — an 8.7% drop — after settling above $100 just two days earlier, FreightWaves reported. The decline followed lower prices Friday that were seen as a "breather" after several days of sharp increases. A cessation over the weekend of what had been nightly U.S. attacks on Iran and other rumblings of negotiations led to higher futures prices the first two days of this week.
Futures Market Disconnect: ULSD vs. Brent
On Monday, the price of ultra low sulfur diesel (ULSD) on the CME commodity exchange declined only 6.9 cents/gallon to settle at $4.1116/g, a slide of just 1.65% — far less than the plunge in Brent. The resulting spread, when converting Brent to cents per gallon and subtracting from ULSD, exceeded $2/gallon, a level with no recent record of occurring, according to FreightWaves. For comparison, on the last trading day before the U.S. and Israel launched attacks on Iran, that spread was about 87 cents/g. By approximately 11:30 a.m. Tuesday, the spread had widened further as Brent fell about 9.7% and ULSD dropped only 0.2%.
| Commodity | Price (Monday) | Change |
|---|---|---|
| Brent (Sept contract) | $88.36/b | -$8.42/b (-8.7%) |
| ULSD (Aug contract) | $4.1116/g | -6.9¢/g (-1.65%) |
| ULSD-Brent spread | >$2/g | — |
Supply Disruptions Tightening Diesel Market
The ballooning spread is reacting to a variety of supply-side factors. Drone attacks by Ukraine on Russian refineries earlier this month, according to Energy Aspects as reported by Bloomberg, pushed Russian refinery operations to their lowest processing level in more than 20 years. Energy Aspects said Russia processed 3.91 million b/d of crude in the first part of July, down 1.4 million b/d from a year ago. Given the physical properties of Russian crude, those refineries are major producers of diesel, and as a result, Russia has banned diesel exports.
Additionally, water levels on the Rhine River after a scorching hot summer in Europe are falling to a level that will impact deliveries. There are projections that levels will soon fall to their lowest since 1990, which will both inhibit fuel shipments and make them more expensive to move on restricted barge usage.
Implications for Diesel Consumers
Given the lag in retail pricing, the latest DOE/EIA price would not have reflected the sharp fall in futures that began Sunday evening. For diesel consumers, the more salient development is that the price of diesel did not match the fall in crude. The widening spread means that any diesel consumers watching oil prices are likely expecting a bigger decline at the pump than what will develop with current trends. Traders and procurement teams should watch for further supply disruptions from Russian refineries and Rhine logistics, which could keep diesel prices elevated even if crude continues to slide.
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