Diesel Benchmark Down Again as Signs Point to Loosening of Inventories

The Department of Energy/Energy Information Administration average weekly retail price declined 5.3 cents a gallon Monday, falling to $3.894. It was the fourth consecutive decline and the biggest one-week drop since Dec. 18, and it puts the price at its lowest level since Jan. 29.

Retail prices are generally the last place to see the impact of other price moves up the supply chain, and this week's price is no different. Oil overall and diesel in particular have been on a downward trend for several weeks coming off a recent peak near the start of April when the international crude benchmark crossed the $90-a-barrel mark and talk of $100 a barrel began once again.

But prices have fizzled since, as Middle East violence continues to have no impact on supplies of oil from the region. On Monday, that crude benchmark Brent closed at $83.33, a slight upturn from the $82.96-a-barrel price from Friday but a long way from a level that would raise fears about $100 prices.

Diesel markets have been elevated relative to crude for months now in part because inventories of diesel and other distillate products stubbornly would not build. Various indicators of the level of inventories, whether in the U.S. or globally, all pointed to tight stocks.

But in the U.S. at least, that trend may be breaking. 

According to the weekly report from the EIA, U.S. inventories of ULSD have been stuck between 106 million and a little more than 108 million barrels since the start of March.

But the price of ULSD on the CME commodity contract has moved into contango in recent days after being in the opposite condition — backwardation — for months. In contango, the lowest price on the calendar is the spot month, which Monday would have been barrels for June delivery. July barrels are priced higher, and August is higher than July.

Backwardation is the opposite structure, with the first traded month at the highest price.

A contango market encourages the building of inventories. The fact that inventories have not built while the market has been in backwardation is not surprising. But if supplies begin to build up despite the backwardation, eventually the pressure of that supply will push the market into contango.

And that's what has happened. At the beginning of March, the backwardation between the first- and second-month ULSD contract on CME was about 10 cents a gallon, with the second month that much higher than the first. But in recent days, the market has moved into a contango of around 1.3 to 1.4 cents a gallon, a shift that will encourage inventory-building. 

The weekly email newsletter of The Tank Tiger, a firm that serves as a broker between storage facilities with space to lease and commercial interests looking to store hydrocarbons, commented on the change.

"If you're not burning distillate, then you have no choice but to store it" company founder Ernie Barsamian wrote in his most recent newsletter. "Commensurate with that, [CME] ULSD futures are showing a seasonal contango, despite the fact that crude oil remains backwardated. Of course, The Tank Tiger was on the leading edge of all of this, as we saw a big spike in inquiries for distillate storage over the last couple of weeks."

Physical market spreads also are not increasing. Those spreads are the ones in key physical markets such as the Gulf Coast and are measured as a differential between physical barrels of ULSD on a barge or pipeline compared to the CME price. They are largely unchanged over the past few weeks and are not at levels that would suggest market tightness.

Another sign of diesel markets loosening came in the earnings information from travel center operator Pilot in the quarterly earnings report of its parent corporation, Berkshire Hathaway. A significant drop in its earnings before income taxes between the first quarter of 2023 and 2024 suggests a sharp decline in the spread between retail and wholesale prices, a key profit driver for any retail outlet. Given the predominance of diesel sales at Pilot, the presumed weakness in fuel spreads mostly came from the diesel market.

The one noteworthy piece of bullish news Monday was that Saudi Arabia's monthly price formula for barrels sold in June had been increased significantly.

The Saudis price their barrels as a differential to key benchmarks, which differ depending on the market that they are selling into. The benchmark price differential for Arab Light was increased to $2.90 a barrel, up 90 cents. That large move is a sign of Saudi Arabia continuing to keep a tight hold on its supplies into the market. 

But the impact on crude prices was minimal with both West Texas Intermediate and Brent rising just 37 cents a barrel by the end of the day.

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