How are diesel prices determined?

Diesel prices, like all commodities, are priced based in real-time based on the balance of supply and demand. Before we dive into how diesel prices are generated, we should discuss the two most important factors in what prices consumers will see at the pump: retail and wholesale.

Retail prices: Retail prices describe the price that consumers will be charged at the pump for diesel. Retailers (otherwise known as truckstops or fuel stops) mark up the current price of wholesale diesel with a margin. The formula is: wholesale price + retail markup + fuel taxes

The markup is established based on what the retailer believes the market will bare. The markup is reflective of the retailer’s ability to maximize price at that moment in time. Retailers will set their markups based on competitive factors, such as local competition and market demand. All retail prices include fuel taxes, which fluctuate based on what state and municipality the fuel stop is in.

Wholesale prices are much more complicated, however. It is largely driven based on how oil and diesel contracts trade on commodity exchanges. Commodity exchanges are regulated financial markets, where hedgers and speculators bet or derisk their exposure to the future price of oil or diesel.

How do wholesale diesel prices get established?

The base number for diesel prices in the U.S. is the ultra low sulfur diesel (ULSD) contract on the NYMEX division of CME, the former Chicago Mercantile Exchange. ULSD trades there along with two other key domestic contracts: West Texas Intermediate (WTI) crude and RBOB gasoline, which can be thought of as gasoline without ethanol blended in. A contract that mirrors the global benchmark Brent crude contract on ICE also trades on CME. The delivery point for the ULSD contract is New York harbor. It is traded in dollars per gallon.

But I’m in Kansas City. How does the New York harbor price translate to diesel prices?

There are five key spot markets in the US where physical petroleum products are traded among market participants: New York harbor, Gulf Coast, Chicago, West Coast and a Mid-continent area known as Group 3, which includes Oklahoma and Kansas. (So if you’re in Kansas City, that will be the market most important to you). Those markets are traded as a differential to the NYMEX ULSD price: NYMEX minus 3 cts, NYMEX minus 10 cts, etc. (Except for the West Coast, the differential tends to be negative.) Price reporting agencies such as S&P Global Platts then publish those prices daily.

What is that price used for?

That price serves two key roles. First, suppliers of diesel at the wholesale distribution point, known as the rack, set a price for diesel each day. That price is drawn heavily from the physical market to which it is linked. Atlanta prices will be linked to the Gulf Coast; Boston prices will be linked to New York harbor. The physical market reflected by price reporting agencies (PRAs) such as Platts will serve as the starting point for those wholesale suppliers to set their prices in their respective locations. Second, the PRA price will often be used as the base in a contract between wholesale buyer and seller, with other costs added on top of it. These two processes essentially ensure that wholesale prices must reflect market conditions. Buyers will have other market-based options if their supplier tries to avoid pricing where the market is. 

Will retail prices always reflect wholesale retail prices?

No. Retail pricing decisions are made by individual station owners, which could be a single-station operation or a chain of huge truck stops. Retailers may choose to try to hold a price up even as wholesale prices decline but that risks competitors using lower wholesale prices to grab market share. Maybe a station has little direct competition; that will impact how competitive it needs to be. One key factor to know: Exxon is not setting the retail price at an Exxon station (ditto for other companies). It sets the price at wholesale and then the stations are on their own (though the company may try to rein in a company making wild swings in the market, to protect the company’s name). 

How do can I track the current wholesale price of diesel?

There are a number of services that track the current price of wholesale diesel prices. You may hear the term “rack price”. This usually refers to the current daily wholesale price of diesel at a local wholesale fuel distributor. SONAR users get access to wholesale rack prices as part of their standard subscriptions. The data is broken down by day and based on each local market’s rack wholesale price. There is even a “spread” index, which shows the difference between wholesale and retail diesel prices. This is important to monitor to show how the diesel retailers are setting their markups.