Diesel Prices See First Increase in Ten Weeks: What’s Driving the Surge?
For the first time since early April, diesel prices have risen, ending a ten-week streak of declining costs. The Department of Energy/Energy Information Administration (DOE/EIA) reported a significant 7.7 cents per gallon increase in the benchmark price for diesel, pushing it up to $3.735. This marks a noticeable shift from the previous low of $3.658 recorded just last week.
The Market Shift in Diesel Prices
The surge in diesel prices follows a similar trend in the futures market for ultra-low sulfur diesel (ULSD). Prices on the CME commodity exchange have shown a steady increase, climbing from a low of $2.2859 per gallon on June 4 to a peak of $2.4868 on Thursday. Monday’s settlement was slightly lower at $2.4825.
Interestingly, this increase in diesel prices parallels gains in the global crude benchmark, Brent, which rose from $77.62 per barrel on June 4 to $84.25 on Monday.
Speculation and Market Dynamics
Analysts have pointed to several factors that may be contributing to the rise in diesel prices, though none stand out as definitive. These include a general rise in asset values, stronger-than-expected U.S. jobs data from earlier in the month, and speculative buying following a prolonged price decline. Despite a stronger dollar, which typically exerts downward pressure on oil prices, diesel costs have continued to rise.
Physical Barrel Market Indicators
One significant bullish indicator for diesel comes from the market for physical barrels. Physical diesel traded on barges or pipelines for near-term delivery has seen strengthening prices. Data from DTN shows that barrels on the Buckeye Pipeline, serving the East Coast and parts of Ohio, had a physical spread of minus 7.5 cents per gallon on Monday, a considerable improvement from minus 29 cents on June 6.
Similarly, the Chicago market experienced gains, with prices moving from negative 35 cents to negative 9.5 cents per gallon. The U.S. Gulf Coast market saw smaller improvements, while in California, the spread dropped from plus 15 cents per gallon on June 3 to even with the CME ULSD price on Monday.
Inventory Levels and Future Trends
Despite these bullish signs, diesel inventories have increased, reaching just under 114 million barrels for the week ending June 7, the highest since February. This is close to the levels seen in early June 2019, indicating a potential oversupply.
On the CME, the price structure for ULSD has moved into contango, where future prices are higher than current ones. Energy economist Philip Verleger notes that this structure is likely to lead to further inventory builds. Verleger’s analysis of “returns to storage” suggests that the financial incentive for storing diesel and selling it later is currently strong, which could lead to continued increases in inventory.
Conclusion
The recent rise in diesel prices marks a significant shift after a long period of decline. Various market factors, from futures trading dynamics to physical barrel market indicators, are contributing to this upward trend. While inventory levels remain high, the current market structure suggests that prices may continue to climb in the near term. As always, stakeholders in the trucking and logistics sectors should stay informed and adapt to these evolving market conditions.
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