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The average retail benchmark diesel price squeezed out a small gain in the past week even as wholesale prices were plummeting and futures prices were also down overall in an otherwise volatile market.

After a two-week run of gains that added just over 50 cents a gallon to the Department of Energy/Energy Information Administration price that is the basis for most fuel surcharges, the price effective Monday was up just 0.2 cents a gallon, to $5.341.

It came even as the national average wholesale diesel price as measured by the ULSDR.USA data series in SONAR was dropping to $4.232 a gallon from $4.555 a gallon a week ago. That movement — with retail prices up slightly while wholesale prices were dropping substantially — helped send the FUELS.USA data series in SONAR up about 15 cents Monday, to $1.14 from just under 90 cents a week ago. 

The futures price of ultra low sulfur diesel on the CME commodity exchange is significantly less than it was a week ago. That benchmark number settled Monday at $3.9201 a gallon, a gain of 9.63 cents on the day after a Friday increase of 6.7 cents. But Tuesday, Wednesday and Thursday of last week saw declines of 9.49, 8.6 and 14.75 cents, respectively, which ultimately led to the overall one-week decline in price.

There also has been up-and-down movement in the value of ULSD relative to Brent crude, the international benchmark. A simple spread between the front month price of Brent on CME and the price of ULSD was at roughly $1.90 a gallon and dropped to less than $1.56 a gallon on Thursday before climbing 10 cents Monday to $1.69 from where the spread had settled Friday. 

A year ago, it was about 50 cents.

This spread has become a key number to watch for diesel consumers, because it has been so volatile. That spread eventually will make its way to the pump price, as evidenced by the fact that according to the EIA, the spread between the national average retail gasoline price this week was $1.47 a gallon. A year ago it was less than 24 cents. 

Gasoline’s spread against Brent is only about 7 cents a gallon more than it was a year ago. So that enormous growth in retail diesel prices compared to gasoline in the past 12 months is a result mostly of diesel blowing out against the Brent crude benchmark.

Diesel is being pulled in different directions by two strong forces. The bullish case for diesel can be found in the inventory figures released weekly by the EIA. Inventories for all non-jet fuel distillates reported last Wednesday stood at less than 26 days’ cover, which means if all imports and distillate production ceased, stocks could cover slightly less than 26 days of consumption. That is far less than normal for this time of year, as that number is generally above 30 days. 

Those tight inventories helped the 12-month spread for ULSD on CME to widen significantly. The spread is in a structure known as backwardation, in which prices decline as they go out on the calendar curve. The spread between November 2022 ULSD and November 2023 ULSD got as low as 91.8 cents Thursday — meaning November 2022 was that much higher than the 12-month price — before rebounding to about $1.07 Monday. Backwardation generally develops in a market with tight inventories, as demand for the scarce barrel to be delivered immediately or soon drives that price up against prices in the future. The end result is a disincentive to store the commodity that is in backwardation, and consumers heading into winter need to see more fuel put into storage. 

Another key number that impacts diesel is falling fast: the price of natural gas. As diesel can be substituted for natural gas in numerous applications, there can often be a correlation between diesel and natural gas.

In the U.S. the price for gas to be delivered at the Henry Hub benchmark delivery point fell Monday to just under $5.20 per thousand cubic feet from about $5.75 per Mcf last Tuesday. And in Europe, the benchmark TTF Dutch natural gas pipeline price, while rising Monday, has fallen relentlessly from its late August high, coming down to about $36 per million BTUs from just under $100 less than two months ago. Natural gas inventory levels in Europe have been reported at healthy levels going into a winter with the prospect of no natural gas imports from Russia looming. 

But to show that the tight inventory situation may be winning the bear vs. bull battle for diesel, that roughly $1.69-a-gallon spread between Brent and ULSD Monday is more than the spread was at the end of August, when the TTF was at its highest levels.

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