Diesel takes another hit and may be driving down broader oil market…
Quick Look:
- Continued Decrease in Diesel Prices: The benchmark diesel price has dropped for the fifth consecutive week, decreasing by a total of 21.3 cents over this period, bringing it down to $3.848 per gallon.
- Market Focus: Current market trends are concentrating on diesel and gasoline, seemingly overlooking the ongoing Middle East conflicts.
- Impact of Global Events: Despite conflicts in Gaza and tensions between Iran and Israel, plus shipping diversions from the Red Sea, oil prices have remained unaffected.
- Diesel Market Trends: Recent decreases in oil prices are increasingly attributed to the diesel market, as opposed to earlier attributions to a tight gasoline market.
- Rise of Renewable Diesel: Energy economist Philip Verleger highlights a structural shift toward renewable diesel, which is reducing U.S. petroleum consumption but not yet accounted for in global oil demand forecasts.
- Industry Discussions: Earnings calls from refining companies have focused on the expansion into renewable diesel and its economic implications.
- Market Weakness and Outlook: Despite a slight increase in diesel sales at Valero, the overall demand for diesel is expected to be flat or slightly down. External factors such as warm winters and disruptions in Russian diesel production are also affecting market prices.
- Refining Margins and Crack Spread: Refining margins for distillates are near breakeven, with the 3-2-1 crack spread showing a notable decline from $29 to approximately $21 per barrel in two months.
With the benchmark diesel price used for most fuel surcharges experiencing a decline for the fifth consecutive week, diesel consumers are seeing significant relief. This trend suggests that market dynamics are largely disregarding the ongoing conflict in the Middle East, focusing instead on the diesel and gasoline markets as the main influencers.
On Monday, the average weekly retail diesel price, according to the Department of Energy/Energy Information Administration, dropped by 4.6 cents to $3.848 per gallon. This ongoing decrease has brought the price down by 21.3 cents over five weeks, marking the lowest level since late January.
Despite potential disruptions from the conflict in Gaza, the tensions between Iran and Israel, and shipping diversions from the Red Sea, oil prices seem unaffected. Typically, such geopolitical events would have a more pronounced effect on crude prices rather than on refined products.
However, the weakness in the market is evident, particularly in the diesel sector, which has recently become a focal point. Since early to mid-April, the gradual decrease in oil prices has been attributed increasingly to the diesel market rather than a previously tight gasoline market.
In his latest weekly report, energy economist Philip Verleger highlights a structural shift in the diesel market due to the rise of renewable diesel, derived from non-petroleum sources like plant oils and animal fats. Verleger points out that U.S. distillate consumption, which is predominantly diesel, remains significantly below pre-pandemic levels—by about 400,000 to 600,000 barrels per day according to recent EIA data. He notes that this data does not account for renewable diesel consumption, which is rising due to EPA-driven regulatory changes prompting refineries to switch production from crude to renewable sources.
This shift is significantly impacting U.S. petroleum consumption, with forecasts of global oil demand yet to adjust to this change, according to Verleger. This topic has also been a key point of discussion on refining companies’ earnings calls, where executives like Phillips 66 CEO Mark Lashier have shared insights into their expanding operations in renewable diesel.
On these calls, management has discussed the weak diesel market, noting that its crack spread against Brent crude has decreased by about 20 cents a gallon in two months. Valero’s executive vice president and COO, Gary Simmons, reported a slight increase in diesel sales compared to last year but projected that demand might remain flat or decline slightly. Conversely, Brian Mandell of Phillips 66 highlighted external factors such as Ukraine’s disruption of Russian diesel production and a warm winter in the northeastern U.S., which have suppressed diesel prices despite strong post-maintenance production by refiners.
This situation has led to reduced refinery operating rates in Europe and Asia, where refining margins for distillates are hovering around the breakeven point. The disparity between product markets and crude is illustrated by the 3-2-1 crack spread, which has dropped to approximately $21 a barrel, a significant decrease from $29 two months earlier.
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