Since the beginning of the year, the wholesale and futures markets for diesel have experienced a rapid turnaround, with the looming ban on Russian diesel imports by the European Union on February 5 being cited as a major factor.
Recent diesel price movements
However, for the time being, U.S. pump prices are still catching up to the decline in futures and wholesale prices that ended 2022.
Because of this, even though the price of diesel has increased by about 28 cents per gallon since its recent low on January 4, this week’s Department of Energy/Energy Information Administration average retail diesel price fell.
Due to Martin Luther King Jr. Day holiday, the EIA released its price report on Tuesday as opposed to Monday as usual. This is a drop of 2.5 cents from the previous week. The majority of gasoline surcharges are based on that pricing.
Even though the price of ultra low sulfur diesel on the CME fell by just 49 cents per gallon on Tuesday, it was the first time since January 4 when the futures price fell to $2.9719 per gallon. After then, the settlement increased for seven straight days before declining on Tuesday.
The looming Russian diesel ban as a key reason
The performance of the fuel relative to crude and the strength of its differential versus the futures price in the physical markets, however, are more significant and illuminating about the viability of the diesel market given the impending Russian diesel ban.
If diesel is strengthening independently or if it is simply riding the rise in oil prices—which are up more than $8 a barrel from the low on January 4—then that would indicate which.
Worsening increase in market spreads
A direct comparison of Brent crude and ULSD on CME revealed some strengthening, but gains that had already begun to decline from a recent peak.
At the beginning of the year, that spread was about $1.13 per gallon. Since then, the trend has been up, with a peak on January 10 at more over $1.31 per gallon. The Brent/ULSD difference, however, has now moderated and was last seen on Tuesday at slightly over $1.19 per gallon.
Spreads in the physical market are also not getting any closer.
Trading is done as a spread against the front-month CME ULSD price in spot physical markets. Trading on Tuesday therefore would have been in contrast to February ULSD, the front month on CME.
Tuesday’s spot ULSD spread in New York Harbor, according to DTN, was spread at 4 cents, meaning barge quantities of ULSD traded at 4 cents more than February ULSD on CME. The spread had a 6 cent week-end last Friday. Every day in 2023, it has continuously ranged between 3.75 and 7.5 cents.
New suppliers, new trade relationships
A future reorganization of supply networks is predicted by the majority of analyses of the Russian diesel ban. There will be a need to find alternative markets for Russian diesel shipments to the EU, which are estimated to reach 700,000 barrels per day this year by oil analytics firm Vortexa, according to a Reuters article.
The nations who were importing more or new supplies of Russian diesel would then purchase less from other suppliers or export more of their own diesel output.
Once the new economic ties are established, it is anticipated that existing Russian diesel exports to the EU will find new markets and supply will return to normal. However, when efficiency fell, shipping costs would rise.
The issue is whether this leads to greater costs for end users or whether Russia ultimately bears these increased expenses in the form of reduced netbacks, which is generally seen to be what is occurring right now in the oil market.
Outlook in the near future
The duration of the process and what happens to the markets in the interim are the other concerns. Spreads on the physical market and against crude indicate that the market is not currently tightening in response to the EU import ban on Russian goods.
In a recent article about the realignment of Russian oil exports, the energy market research company HFI Research noted that data suggests they have not decreased from prewar levels and have rather increased over the past several months, albeit to a very different lineup of clients.
“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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