Diesel prices fell for the 14th time in the last 18 weeks on Monday, dropping 2.5 cents to an average of $3.838 per gallon according to U.S. Energy Information Administration data. The latest dip comes as traders realize that the potential for cold winter weather to lift fuel prices is fading.
The benchmark diesel price has plunged 79.5 cents per gallon since its peak of $4.633 on September 18th. It remains down 76.6 cents year-over-year and has declined $1.503 from its all-time high of $5.341 per gallon on October 24th.
Outlook Calls for Warmer Temperatures
The National Oceanic and Atmospheric Administration released its latest temperature outlook this week, forecasting warmer-than-normal conditions across much of the contiguous United States over the next 10 to 14 days.
With the front-month heating oil contract on the Chicago Mercantile Exchange already trading March delivery barrels, the heating season is essentially wrapping up from a trading perspective by early February. As a result, there is little prospect of a late cold snap to spur an extended inventory drawdown that could drive a price surge.
The shift in weather expectations has already impacted natural gas markets. After peaking at $3.313 per thousand cubic feet on January 12th, Henry Hub prices plunged nearly 90 cents in just five trading days, settling at $2.419 on Monday.
Vessel Diversion Adds Some Support
The ongoing diversion of vessels, including oil tankers, around the Cape of Good Hope rather than through the Suez Canal has tightened fuel supplies somewhat. According to data from the energy consultancy Energy Aspects, more ships carrying middle distillates like diesel are opting for the longer route.
While this vessel diversion is bullish for prices in tying up inventory for longer periods, it has not been enough to overcome increasingly bearish signals.
Wholesale Diesel Markets Weak
Despite relatively stable ultra-low sulfur diesel (ULSD) futures on the CME last week, wholesale diesel markets showed signs of weakness.
The national average wholesale price, as measured in FreightWaves’ SONAR data platform, fell to $2.585 per gallon on Monday from $2.654 the prior week. Declining wholesale prices typically foreshadow retail drops.
Regional price differentials also deteriorated, hinting at local market softness. In Chicago, the differential for CME ULSD futures widened to minus 51 cents per gallon compared to minus 45 cents on January 16th.
The Group 3 differential, encompassing the Midwest, stood at minus 44.5 cents per gallon Monday versus minus 34.5 cents in mid-January.
Meanwhile, differentials in Los Angeles hit minus 15 cents a gallon – the weakest level since April.
Forecast Points to Further Declines
Barring any major unexpected disruptions, the easing of winter weather concerns points to steadily falling diesel costs heading deeper into 2024.
Upward moves in the coming weeks will likely be short-lived given high inventory levels and the fading potential for cold-induced draws. By mid-February, the heating oil trader’s season is largely finished.
With refiners able to meet demand, the underlying supply-demand balance should remain loose for the near future. Industry data shows diesel inventories in the Central Atlantic region at their highest seasonal level in three years.
The wild card is whether rising economic activity re-tightens fundamentals. For now, that possibility remains months away. But if manufacturing and freight volumes accelerate, it could soak up excess stocks and firm up prices.
Until underlying market conditions shift, however, the path of least resistance for diesel appears to be down. Each tick higher in price will likely face selling pressure from traders banking on lower prices ahead.
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