Key diesel prices down to levels not seen since March

The second price that hit March levels Monday was the ultra low sulfur diesel price on the CME commodity exchange. It declined 10.8 cents to settle at $3.1291 a gallon, for a two-day decline of 28.24 cents. The settlement Monday was the lowest on CME since a March 16 settlement of $3.1001 a gallon. Prices soared the next day in reaction to the already ongoing Russia-Ukraine war.

Prices continue to be pressured by several factors, including the still-soaring dollar. There is an inverse relationship between the dollar and commodity prices based in dollars, which in international markets is most of them. 

The value of the DXY dollar index on the ICE commodity exchange has risen from about 104 to 114 since the end of June, an enormous move in a short period of time. Just in the past two trading days, the dollar has risen from a Friday low of just over 111 to levels Monday that consistently traded above 114. That sort of move creates major deflationary pressures.

However, markets will be watching Hurricane Ian and its impact on oil markets. Both BP and Chevron announced production shut-ins Monday at some of their Gulf of Mexico platforms in anticipation of Ian. 

But the most widely expected track of the storm takes it along the west coast of Florida, making landfall somewhere between Naples and the Tampa Bay area. Offshore production in the Gulf of Mexico is farther west than where Ian is expected to make landfall. There are no refineries in Florida. 

The only scenario that might result in disruptions to oil markets is if Ian took a more westward track and instead of making landfall in the Tampa area or on the Florida Panhandle, it swung into the New Orleans area, disrupting refinery activity there as well as leading to a more sweeping shut-in of Gulf of Mexico production. But only one possible track shows Ian making such a move.

Another bearish factor working to push down diesel prices is a reduction in trader interest in diesel. John Kemp, the chief energy correspondent for Reuters, reported Monday that data from the Commodity Futures Trading Commission show traders have become more bearish on distillate. A ratio of bullish to bearish positions by traders fell to 2.28 to 1 on the most recent data, down from almost 5 to 1 in mid-June, according to Kemp.

Even with that decline, there has not been significant weakness in the spread between ULSD and Brent on the CME in recent days. Comparing front month prices, the Brent-to-ULSD gap Monday was 47.36 cents a gallon. That is essentially flat from a week ago. And while it is lower than the spread of almost 60 cents just two to three weeks ago, and a lot less than when it was $1.50 to $1.60 during parts of June, it remains elevated from historic levels. The spread averaged about 37 cents for all of 2022. 

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