Upward move for DOE/EIA diesel price after three down weeks

After three weeks of declines, the Department of Energy/Energy Information Administration weekly diesel price turned upward.

The price came in at $3.339/gallon, an increase of 1.5 cents. It’s just the second increase in the last six weeks.

Commodity diesel prices were on a significant upturn last week, though they were coming off a few days of big declines from the end of the prior week. Those sorts of big swings inevitably create a situation in which retail movements might differ far from the broader swings in wholesale and commodity prices.

At the start of last week on Aug. 18, ultra low sulfur diesel on CME jumped more than 6 cents/gallon, a 3.08% increase. The week before was dominated by bearish market concerns about the delta variant slowing global demand, but those worries seemed to disappear last week. After ULSD on the CME commodity exchange closed Aug. 18 at $2.0668, it moved up to $2.1092 by Friday before climbing higher on Monday in reaction to Hurricane Ida. (Please see related coverage here.)

One market development that should be of concern to diesel consumers: the strength of the market backwardation.

Backwardation is a market structure in which the highest price among all the prices that go out on the calendar schedule is the front month. September delivery of ULSD in New York harbor is the current front month; it will be through Tuesday. On Wednesday, the first day of the new month, the September contract disappears and October will be the front month.

Backwardation develops when inventories begin to tighten. While the weekly inventory reports published by the EIA do not suggest diesel inventories are tight, the backwardation clearly does. 

At the settlement on Monday, the 12-month backwardation between September 2021 deliveries and September 2022 deliveries was 8.33 cents, with 2021 prices that much above those from 2022. That size backwardation has not been seen in the ULSD market for several years. 

A backwardation that steep could be suggesting tighter inventories, or could be that the front month is being lifted by end-of-the-month short covering that will disappear when September rolls off the board. 

But the backwardation between October 2021 and October 2022 settled Monday at just under 8 cents, suggesting that what is going on with September is not just a short-term phenomenon.

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