Diesel Prices Surge: A Cold Winter Ahead?
The diesel market is heating up, with the benchmark price experiencing its largest increase since June. The Department of Energy/Energy Information Administration’s average weekly retail price jumped 5.8 cents a gallon to $3.561, marking a significant surge.
Futures Market on the Rise
The ultra-low sulfur diesel (ULSD) contract on the CME commodity exchange has seen a substantial increase in recent days, with the futures price rising from $2.2053 a gallon on December 26 to $2.36 on Friday. Although futures moves don’t immediately impact retail prices, they do have a quick effect on wholesale prices, which can take weeks to trickle down to consumers.
A Shift in Market Structure
The spread between the first- and second-month contracts on the ULSD contract has flipped into backwardation, indicating tighter inventories. This shift is unusual, given the Energy Information Administration’s report of a significant build in distillate inventories, including diesel, last week.
Global Market Influences
The ULSD market is influenced by global distillate and petroleum markets, not just those in the U.S. Diesel continues to outperform other contracts, such as domestic WTI crude, international crude benchmark Brent, and RBOB gasoline. The spread between ULSD and Brent has widened, reaching over 54 cents a gallon last week.
Cold Weather on the Horizon?
The surge in diesel prices may be attributed to the anticipation of a cold winter, following several warm winters. This is supported by developments in the natural gas market, where prices have risen above $3 per thousand cubic feet. The increased demand for diesel and natural gas could be a sign of things to come.
What’s Next?
As the diesel market continues to heat up, it’s essential to keep an eye on the futures market and inventory levels. With the shift to backwardation, it’s likely that prices will remain volatile in the coming weeks. Stay tuned for further updates on this developing story.
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