EIA diesel benchmark rises as other market factors indicate otherwise

Concerns about diesel prices are starting to rise in the market, although there are some indicators that could signal some moderation.

The tight diesel market and the fact that the “day’s reach” of inventories has fallen to less than 26 – an extremely low figure but that doesn’t mean “we’ll run out of diesel in 25 days” – has prompted a definite overreaction at large Sharing the discourse on diesel supply.

On Monday, a tweet from a Pennsylvania freeway sign indicating that a nearby rest stop was out of diesel was circulated as evidence the market was in a full-blown crisis. But as GasBuddy reported, the problem at this stop was a technical one. After the technical problem was solved, diesel sales resumed.

Good news for consumers could be found in the market on Monday as prices fell after two days of sharp gains late last week. You can also look to East Coast inventories, which rose according to last week’s report, although a key national indicator could be measured in other ways. Not all signs point up, nor do they all point down.

The ebb and flow of the recent market can be seen in the movement of the Ultra Low Sulfur Diesel (ULSD) contract on the CME Commodity Exchange. After four days of moving lower between $3.65 and $3.70 a gallon, prices rose on Thursday and Friday to settle at $3.9148 a gallon for the week after nearly breaching $4 on Thursday.

But trading Monday could be seen as good news for diesel buyers. ULSD was down 13.37 cents a gallon on Monday to trade at $3.7811. More importantly, the spread between crude oil and diesel narrowed.

This move – if only for a day – is significant as a good chunk of the rise in diesel prices over the past few weeks has been attributed to diesel beating crude oil benchmarks and outperforming gasoline. In September, a simple spread between the front month price of Brent crude and ULSD averaged about $1.25 per gallon. Depending on how you’ve measured it since then — for example, not counting the crazy market at the end of the month when the November contract expired — the average has been between $1.60 and $1.65 a gallon. The spread was back down Monday to around $1.25 a gallon.

Given the volatility in the market, the average retail price for diesel released Monday by the Department of Energy’s Energy Information Administration, which forms the basis for most fuel surcharges, seemed almost an afterthought. Its relatively small move up from 1.6 cents a gallon to $5.333 a gallon shows the dilemma retailers face in a market like this. When the wholesale prices they pay go up and down day-to-day (as evidenced by the ULSDR.USA datafeed in FreightWaves SONAR, which tracks the national average wholesale price for diesel fuel), where should a retailer change its price from one day to the next put ?

Monday’s front month ULSD settlement of $3.7811 is just pennies up from Oct. 20th. But during that time it surged to over $4.33 a gallon in late October when the November contract was squeezed before expiry at the close of trading on October 31st.

One market that has been negative for diesel has been natural gas, but that could be coming to an end.

Henry Hub’s natural gas futures price on the CME Commodity Exchange settled below $5 per thousand cubic feet (Mcf) on Tuesday. But since then, as the long-term forecasts project significantly colder weather in the USprices have risen with Monday’s front month price settling at $6.944/Mcf, a huge daily gain of 54.4 cents/Mcf.

With warmer weather prevailing in the US in recent weeks, along with the same conditions in Europe, it weighed on both American and European natural gas prices, a bearish factor for diesel. Diesel, or certain other distillates such as heating oil, can be used as a substitute for natural gas in both heating and industrial applications – and lower natural gas prices make this less likely.

For this reason, price increases on both the Henry Hub (a physical delivery point in Louisiana) and TTF’s Dutch natural gas market are a cause for concern. Adding to the increases at Henry Hub, TTF price topped $36 per million BTU on Monday, down from just $30 just a week earlier.

Natural gas stocks in Europe have exceeded the most optimistic forecasts. Ira Joseph, a longtime natural gas analyst who now works at Columbia University’s Center on Energy Policy, tweeted Monday that natural gas supplies are still rising at a time of year when they would normally be declining.

Last week, during its quarterly conference call with analysts, TravelCenters of America (NASDAQ: TA) management addressed analyst questions about the diesel market as one of the biggest sellers of the fuel in the country.

On the call, CEO Jon Pertchik acknowledged that “there’s a lot of noise” about diesel shortages. He recalled similar fears in the spring about East Coast deliveries, adding that the chatter was “maybe a little louder this time”.

And since TA, like other big tank stops, is the majordomo of buyers, Pertchik likely has a level of confidence that not every other buyer could possess.

“We have a pretty high level of confidence that if we stay dry anywhere it will be rare and short lived and very focused [on] certain key areas or certain specific areas,” said Pertchik. “We’re not expecting any … protracted outages where we’re going to dry out. When they happen they will be very concentrated and in very limited areas and for relatively short periods of time. The way we buy fuel, our short and long term contracts give us a level of protection.”

But the latest EIA inventory report gave cause for concern. While East Coast ULSD inventories rose more than 7 percentage points, they were still at about 63% of the five-year average excluding 2020. However, that figure was below 60% a week earlier.

Conversely, inventories of all distillates — the stocks that have been the focus of the “we’ll run out in 25 days” talk — have fallen to less than 79% of the five-year average for October’s fourth weekly report, from about 84.3% in the first week of month.

More items from John Kingston

Winter is coming and that could have a major impact on the already rapidly rising diesel market

The DOE methodology for determining diesel prices sees two major changes

Tight inventories push diesel past crude oil and gasoline; OPEC cuts secondary

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