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Diesel markets have turned around sharply in futures and wholesale markets since the start of the year, and the looming Feb. 5 ban on European Union imports of Russian diesel is seen as a key reason.

But for now, U.S. pump prices are still catching up to the downturn in futures and wholesale prices that closed out 2022. As a result, this week’s Department of Energy/Energy Information Administration average retail diesel price declined despite an increase of almost 28 cents a gallon since a recent Jan. 4 low price.

Released on Tuesday rather than the usual Monday due to the Martin Luther King Jr. Day observance, the EIA posted a price of $4.524 a gallon, a decrease of 2.5 cents from last week. That price is the basis for most fuel surcharges.

While the price of ultra low sulfur diesel on the CME declined Tuesday by just 49 cents a gallon, that was the first decline in the futures price since Jan. 4, when it settled at $2.9719 a gallon. The settlement had risen seven consecutive days after that before Tuesday’s decline.

But with the Russian diesel ban looming, what is more significant and revealing about the strength of the diesel market is how the fuel is performing against crude and the strength of its spread against the futures price in the physical markets. That would suggest whether diesel is strengthening on its own or is just riding the increase in crude prices, which are up more than $8 a barrel from the Jan. 4 low.

A straight comparison of Brent crude versus ULSD on CME showed some strengthening, but gains that already have backed off from a recent high. 

That spread opened the year at a little over $1.13 a gallon. The trend has been upward since, with a spike Jan. 10 to more than $1.31 a gallon. But since then, the Brent/ULSD spread has backed off and came in Tuesday at just over $1.19 a gallon.

Physical market spreads are also not showing signs of tightening. 

In spot physical markets, trading is conducted as a spread against the front-month CME ULSD price. So trading Tuesday would have been as a differential to February ULSD, which is the front month on CME.

According to DTN, the spread for the spot ULSD differential in New York Harbor on Tuesday was 4 cents, meaning barge quantities of ULSD traded at 4 cents more than February ULSD on CME. Last Friday, the spread closed the week at 6 cents. It has been consistently between 3.75 and 7.5 cents each day of 2023.

Most analysis of the Russian diesel ban sees an eventual reordering of supply lines. Russian diesel exports to the EU — which have been pegged by oil analytics firm Vortexa as 700,000 barrels a day this year, according to a Reuters report — will need to find new homes in other parts of the world. Those countries taking in higher or new supplies of Russian diesel would then take less from other suppliers or export more of their own diesel production.

Eventually, the new trade relationships would be expected to allow current Russian diesel exports to the EU to find new homes and supply would normalize. But shipping costs would increase as efficiency decreases. The question is whether that results in higher costs to end users, or whether Russia ends up eating these higher costs in lower netbacks, which is generally seen as what is happening now in the crude market. 

The other question is how long it will take and what happens to markets in the interim. The spreads in the physical market and against crude suggest, for now, no reaction that suggests the market is tightening in anticipation of the ban on Russian imports into the EU.

The energy market research firm HFI Research recently wrote about the realignment of Russian crude exports, noting that data is suggesting they have not fallen from prewar levels and are clearly up over the last few months, albeit to a completely different lineup of buyers.

“On paper, you would think that Russian crude exports should have fallen by now given the EU sanction ban starting in December, but January data is flying in the face of that,” HFI wrote in a research note. “Could this just be a push once again ahead of the product ban? Maybe, but the data is far too uncertain to draw any definitive conclusion.”

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