Benchmark diesel posts its biggest 1-week decline in almost a year

The price plunge came on the heels of a recent decline in the price of ultra low sulfur diesel (ULSD) on the CME commodity exchange, a trend that appears to have stabilized in recent days.

November was a volatile month for the ULSD contract on the CME commodity exchange. Its settlement on the first trading day of the month, November 3, was $2.4053/g. It climbed to a settlement as high as $2.7011/g on November 18 before beginning a steady downward drift that saw the month close with a settlement of $2.333/g, about 7 cents less than the first day of the month.

In the last five trading days, ULSD on CME has mostly been in a range of $2.32-$2.35/g. In early trading Tuesday, it was $2.3239/g at approximately 10:05 a.m. EST.

One thing that did not occur in trading Monday and into Tuesday was any sort of reaction to the decision by OPEC+ over the weekend, meeting virtually, to hold its production level steady. 

The group, which consists of OPEC members and several non-OPEC oil exporters nominally led by Russia, has been increasing its output for several months. While the actual increases haven’t always matched what the group said it would do, total OPEC+ output, according to S&P Global Energy, rose from 41.79 million b/d in June to 43.09 million b/d in October. 

Brent crude, the world’s benchmark, declined just 3 cents/barrel Monday after the news of the OPEC+ decision to hold the line on its output increases. 

That decision to keep quotas steady is effective in January. The OPEC+ group already had decided on a 137,000 barrels/day increase in December.

Another oil market development in recent days has been a deflation of the surge in diesel prices relative to crude. 

Much of that jump had been attributed to a tightness in inventories. The chart below shows how total U.S. inventories of non-jet distillate, which are generally a little less than 90% ULSD, compared in the fourth report of November over the last 10 years. Products like heating oil make up the balance beyond diesel. (Jet is a distillate but has its own EIA category).

And while the most recent inventory level reported by the EIA is less than the corresponding week of recent years and historical norms, two market-related price signals are suggesting the surge in diesel prices compared to crude has come to an end as inventories may have stabilized.

A straight comparison of the CME’s first month price for global crude benchmark Brent with ULSD saw that spread widen to as much as $1.1561/gallon at the November 18 settlement. But it began to fall soon after, with the last three settlement days on either side of 83 cts/g. 

That is still relatively high. The average for the year, even including the strong numbers of recent weeks, is about 67.3 cts/g.

Additionally, the spread between first month and second month ULSD has narrowed. The premium of first month ULSD over second month ULSD is considered a function of inventory tightness. It had risen as high as 8.17 cts/g on November 20. But the three trading days to close out November saw the spread settle at less than 3 cts/g, with it popping slightly above that level Monday. 

One development that could impact oil and diesel performance in coming weeks is a recent jump in the price of natural gas as a cold December in the U.S. is predicted.

The natural gas settlement pf $4.921/thousand cubic feet Monday on CME was the highest in almost four years. While there is no one-for-one correlation between natural gas and oil, a significant divergence up or down in the natural gas market can ultimately have an impact in the petroleum market.

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