The Diesel Roller Coaster: Ups, Downs, and Uncertainties


Published September 20, 2023

The diesel market has been on a wild ride recently, with prices and trends shifting dramatically in just a matter of days. If you’ve been keeping an eye on the fuel pump or following the markets, you’re likely aware of the roller coaster we’re currently riding.

Fuel Prices on the Rise

First up, let’s talk about the prices at the pump. On a gloomy Monday, the Department of Energy reported a not-so-great update: the average weekly retail price of diesel shot up by 9.3 cents a gallon, landing at a hefty $4.633. To put that into perspective, we haven’t seen prices this high since December 12 when they were at $4.754 per gallon. This retail price serves as the benchmark for fuel surcharges, which means it’s a big deal for many industries.
If you’ve been tracking diesel prices since July 3, you’ll know they’ve climbed by a whopping 86.6 cents per gallon. But here’s the twist – the retail market seems to be lagging behind the futures and wholesale markets by a considerable margin.

Futures and Wholesales Aren't Playing Nice

Over at the Commodity Exchange (CME), ultra low sulfur diesel (ULSD) saw a recent low of $3.1927 per gallon on September 6, just after Labor Day. However, things escalated quickly, with prices soaring to $3.4815 per gallon in just six days of trading. That’s an impressive 28.88 cents per gallon increase.
But hold on tight, because in the past two trading days, ULSD took a nosedive. Monday alone saw a drop of 9.51 cents per gallon, and on the preceding Friday, it fell by 9.81 cents. That’s a staggering 19.32 cents in a mere two days, marking the most substantial two-day decline since January.
The closing price on Monday, $3.2883 per gallon, actually dipped below where it stood on September 8. This could suggest that traders, looking at the wide gap between crude and diesel prices, are anticipating a return to a more typical relationship between the two. Though, let’s admit it, “typical” in the diesel world has become somewhat of a gray area, thanks to factors like Russian supplies and the ripple effects of IMO2020.

Traders on the Move

Former trading executive Ilia Bouchouev chimed in on Twitter, suggesting that traders might be responding to the robust diesel margins, which essentially measure the difference between crude and diesel prices. The sharp drop in the diesel crack spread seems to be a sign of traders cashing in on their diesel positions after the recent price surge.

Ilia Bouchouev’s tweet

Crude Oil's $100 Question

While diesel prices were making their roller coaster moves, the crude oil market had its own drama. Chevron CEO Mike Wirth stirred the pot by hinting at the possibility of $100-a-barrel crude. Brent futures on Monday closed at $94.43 a barrel, marking a nearly $10 increase since August 28.
However, Citigroup, known for its commodities research, threw a bucket of cold water on the $100 fever. They suggested that while hitting a hundred bucks is possible in the short term, it might not be sustainable. Citigroup pointed to increased supplies from countries like Canada, Brazil, Argentina, Guyana, and Norway, along with a boost in U.S. production. According to the EIA’s Short Term Energy Outlook, the U.S. is projected to crank up production by 900,000 barrels per day this year and an additional 400,000 barrels per day next year.

Signs from the Physical Diesel Market

But what’s happening in the physical diesel market in the U.S.? Here’s where things get interesting. The spread between spot physical ULSD and the ULSD price on CME, which dictates diesel pricing in physical trading, has shown some significant weakness recently.
Data from DTN Energy reveals that in the Chicago market, the spread on Monday was negative 50 cents a gallon compared to ULSD on CME. On September 1, it was just negative 13 cents. In the Gulf Coast market, the spread on Monday was negative 8 cents a gallon, slightly worse than the negative 5 cents seen on September 1. And in New York Harbor, the spread dropped from plus-3 cents on September 1 to just plus-1 cent.

Crude's Tightening Grip

Now, let’s not forget about crude. Prices there are signaling tightness, and it’s not just about the outright price. The spread between front-month Brent and barrels for delivery six months into the future is in backwardation, a sign of a tight market. In a backwardated structure, the front-month price is the highest, and prices decline as you look further into the future. The steepness of this curve depends on factors like interest rates and inventories, with tighter inventories leading to steeper future price declines.
On Monday, the Brent contract for May 2024, six months beyond the front-month November contract, continued to lag behind. This indicates that inventories are continuing to tighten.
So, there you have it – the diesel market’s recent ups and downs, the $100 crude debate, and the signals from both the physical diesel and crude markets. Buckle up, because it’s a bumpy ride, and predicting where we’ll go next is anyone’s guess.