Diesel Prices Surge for First Time Since April

In a noteworthy shift, diesel prices have surged for the first time since early April, ending a prolonged period of declines. The Department of Energy/Energy Information Administration (DOE/EIA) reported a 7.7-cent increase in the average weekly retail diesel price, bringing it to $3.735 per gallon. This rise follows a series of nine consecutive weekly declines, which saw prices fall from $4.061 per gallon in early April to a low of $3.658 last week.

The recent increase in diesel prices is the largest since a significant 21-cent jump on February 12. This upward movement is primarily attributed to substantial gains in the futures market for ultra-low sulfur diesel (ULSD). The price for ULSD on the CME commodity exchange rose from a recent low of $2.2859 per gallon on June 4 to a peak of $2.4868 on June 13, with a slight dip to $2.4825 on June 17.

Interestingly, there is no single dominant market trend driving this price increase. Analysts have pointed to a range of factors, including a general rise in asset values, stronger-than-expected U.S. jobs data, and speculative buying following a prolonged price decline. Additionally, the relationship between the dollar and oil prices has not followed typical patterns, with prices increasing despite a stronger dollar.

On the physical market side, there have been notable gains in the price differentials for ULSD. For example, the Buckeye Pipeline saw its differential improve from minus 29 cents per gallon on June 6 to minus 7.5 cents on June 17. Similar trends were observed in the Chicago market, while the U.S. Gulf Coast market saw smaller gains. In California, the differential dropped from plus 15 cents per gallon on June 3 to even with the CME ULSD price on June 17.

Despite these bullish indicators, inventory data presents a more bearish outlook. ULSD inventories for the week ending June 7 reached just under 114 million barrels, the highest level since February. This inventory level is comparable to the first week of June 2019, before the pandemic caused significant market disruptions.

Moreover, the ULSD futures market has moved into contango, where prices rise over time, suggesting that future months' prices are higher than the current month. This market structure, coupled with favorable "returns to storage" metrics, indicates that firms with storage capacity may continue to build diesel inventories.

Energy economist Philip Verleger has noted that current conditions favor further inventory increases. He highlighted that the financial returns from storing diesel for future delivery are currently attractive, even when factoring in market interest rates.

As diesel prices and market dynamics continue to evolve, stakeholders in the energy and transportation sectors must stay vigilant and adaptable to navigate these changes effectively.