Diesel fuel prices continue to decrease for the 16th time in 17 weeks, with this week’s decline of 1.4 cents being the smallest of the past five weeks. As reported by the Department of Energy/Energy Information Administration, the average weekly retail diesel price is now down to $3.883 per gallon. This is a significant drop from the $4.622-per-gallon price it stood at before the recent decline and is also the lowest level since Jan. 31 of last year.
Despite the declining U.S. diesel inventories, futures markets are not reacting as expected. The ultra-low sulfur diesel on the CME commodity exchange settled at $2.3664 a gallon on Monday, down a little over 1 cent in the past week. While U.S. inventories of ultra-low sulfur diesel remain unchanged at 95.6 million barrels, the DOE/EIA average retail diesel price has significantly dropped compared to last year.
Refiners are prioritizing gasoline production due to its increased profitability, which is leading to lower diesel output. However, a report from consulting firm Energy Aspects suggests that diesel inventories are likely to remain tight. Despite this, other market indicators do not show traders to be worried about the inventory squeeze. The spread between ULSD and Brent crude on CME largely tracks moves in crude after declining between March and April, indicating that the market is not overly concerned about tight diesel supplies.
In its monthly report on the market for middle distillates, Energy Aspects said the firm is “constructive” on the spread between crude and diesel, an analyst term for “It’s going to go up.”
“The yield shift into gasoline is also tightening Atlantic basin balances, with our revised forecast indicating the U.S. will be able to maintain exports or build domestic [diesel] stocks, but not both,” Energy Aspects said.
ExxonMobil’s refinery in Texas has new capacity to produce diesel, but refiners’ focus on gasoline is limiting US supply growth and causing the diesel market to tighten. Despite new distillate-oriented refinery capacity, the U.S. must keep barrels at home to meet domestic needs, resulting in high prices for ULSD and a need for the U.S. to price highly in order to prevent depletion of inventory.
Interest rate increases also pose a constraint on building inventories, as the cost of capital is higher than it has been. Energy economist Philip Verleger predicts that interest rate increases could lead to a significant reduction in inventories, affecting both crude and diesel markets.
Source: FreightWaves
