Diesel’s price decline Tuesday was historic; crude’s fall sets another record

A day after crude oil trading on a major exchange turned negative, the price of ultra low sulfur diesel on the same exchange did something it hadn’t done in almost 30 years.

The ULSD contract on CME closed down 16.09 cents a gallon Tuesday, settling at 72.69 cents. That is a drop of 18.12%. The only time it dropped more than that was in January 1991, on the day after the initial shots were fired in the first Gulf War after the Iraqi invasion of Kuwait. As it became clear quickly that the war was not going to extend into some Middle East-wide conflict, oil prices that had been bid up in anticipation of such a development fell hard. The decline that day in what was then a heating oil contract, but ultimately morphed into the current ULSD contract, was 32.3%, with prices falling 29.6 cents a gallon.

There are other days on which the size of the drop was up near the level of decline Tuesday. But they were when the contract was for heating oil, and as a trading month went off the board and rolled to a warmer month, like in March, the front-month price would plummet.

But that is not an apples-to-apples comparison to the tremendous decline of Tuesday. The ULSD contract on CME is now down 64.7% from its recent Jan. 3 high of $2.0614 per gallon.

ULSD’s sharp decline came as the market was digesting the shocking move Monday to negative prices in the May contract for West Texas Intermediate crude. While that contract moved back into positive territory Tuesday, it was its expiration day and the increase means little to nothing.

What was significant was the decline in the June contract for crude. It fell $8.87 a barrel to $11.57, a decline of 43.37%. That percentage decline is more than twice the size of the largest one-day decline in the history of the contract going back to 1983.

The same conditions that drove crude into negative territory Monday were present in the decline of prices Tuesday. First, the collapse in world demand that might be as much as 25-30% of pre-pandemic consumption. Second, the fact that crude supply is only gradually being reduced as a new OPEC+ deal kicks in and sheer economics closes wells. And third, the likelihood that the ability to store crude oil on land will have run out in the U.S. sometime next month.

Measuring the ability to store crude is difficult. Measuring the ability to store diesel is even harder. Much of the storage capability is at refineries, not public tank farms like the giant storage capacity in Cushing, Oklahoma.

Following the close of trading, the weekly American Petroleum Institute inventories were released to subscribers. Although the numbers are private, the most important data points are widely disseminated over Twitter. Although S&P Global Platts predicted a build in distillate inventories of 3.7 million barrels in the U.S. — distillates include ULSD as well as jet fuel and heating oil — the API numbers came in at a build of 7.639 million barrels.

The weakness in diesel is not just happening on the CME exchange. It’s also visible in the spread between key physical grades and the dated Brent global crude benchmark.

For example, comparing the price of ULSD in New York Harbor to dated Brent, that spread Tuesday stood at $16.97 a barrel. On April 2 it was $23.15.

ULSD for export in the Gulf Coast had a spread Tuesday of $11.94 per barrel. ON April 2, it was at $18.37. 

The weakness in physical diesel can be seen in wholesale rack prices, which have fallen slightly faster than the decline in CME prices through Monday. For example, the average ULSD wholesale rack price in Atlanta went from 94.13 cents a gallon Saturday to 85.29 cents on Tuesday while the CME price was dropping about 7 cents. But in Houston, the decline in rack prices was from 95.03 to 88.91.

National average wholesale diesel rack prices from SONAR

As far as the market racing toward a storage armageddon, with no place else to put crude, a tweet published by the energy analytics firm of Kpler said the key delivery point of Cushing had less than 20 million barrels of crude storage remaining. The API statistics released Tuesday reported that Cushing inventories last week rose by 4.9 million barrels, which would mean that it would fill to tank tops in less than a month.

The Kpler tweet also said it estimates that storage in the region known as PADD 3, which includes the Gulf Coast, has another almost 70 million barrels to fill.