On the day when the benchmark diesel price used for most fuel surcharges fell for the 13th time in 16 weeks, the futures market suggested this decline may have more room to run.
The weekly Department of Energy/Energy Information Administration weekly average retail diesel price declined 4.8 cents a gallon to $3.828. It was the 10th decline in the last 11 weeks.
Since Sept. 18, the last date before the run of mostly declines began, the DOE/EIA diesel price has dropped 80.5 cents a gallon.
The decrease in the retail benchmark price comes after several days in which the futures price of ultra low sulfur diesel (ULSD) on the CME commodity exchange trended higher, primarily on the back of concerns that shipping through the Red Sea and Suez Canal would push oil into further voyages. The practical effect of such a disruption is that oil ends up in inventory longer than it would be otherwise, which is bullish for prices.
But the upward trend in reaction to the Red Sea strife wasn’t that strong. It did come after prices already had been elevated by a significant amount of buying that was believed to be tied to traders with short positions, betting the price would drop. That resulted in many traders deciding to close those short positions with a round of buying. That trend took the ULSD price up to a settlement of $2.7168/g on Dec. 19.
But that trend couldn’t hold and ULSD opened 2024 trading with a Jan. 2 settlement of $2.5258 a gallon. Suez Canal concerns did lift the price back over $2.60 a gallon for a few days last week.
That mildly upward trend ended Monday. The decline in ULSD was relatively mild, just 3.16 cents a gallon to $2.5769 a gallon, a drop of 1.21%.
But over in crude markets, the declines were much steeper Monday. A drop of $3.04 per barrel in the West Texas Intermediate crude market took prices down to $70.77 per barrel, a drop of 4.11% from Friday. Global crude benchmark Brent declined slightly more, about 4.2%. RBOB gasoline, the unfinished proxy product for finished gasoline, dropped 3.69%.
Consensus in the market was that it was the Saudi announcement of its price formulas for February that created the selloff. Saudi Arabia prices its crude as a differential to benchmarks in various regions. For example, in North America, the Saudis set a differential to a price index set by Argus Media called the ASCI price. There are different benchmarks in different parts of the world.
The formulas for February, which came out late Sunday U.S. time, showed widening of the discounts to the benchmarks. For example, the differential in the Saudi formula for sales of its Arab Light crude into Asia widened by $2 per barrel, an enormous one-month move.
It was seen by the market as a sign that Saudi Arabia is either going to get aggressive in clawing back market share it may have given up in the second half of 2023 as it implemented several production cuts aimed at stabilizing the price of oil, or that its order book is showing weak demand and it responded in kind.
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