After falling for eight straight weeks, the benchmark diesel fuel price used for most fuel surcharges in the U.S. turned higher this week. The 2-cent per gallon increase on Tuesday to $3.914 marked the first rise since mid-October when prices had spiked over 10 cents.
Shift in Oil Market Sentiment
The reversal comes amid a notable shift in oil market sentiment in recent trading sessions, particularly over the past few days. This change is evident in the latest diesel price increase published by the Department of Energy’s Energy Information Administration (DOE/EIA).
Given that much of the sentiment shift has occurred due to geopolitical factors that could spill over into supply worries, crude oil has strongly outperformed diesel and other refined products in recent weeks as bearish views faded and bulls took control.
Brent crude on the CME commodity exchange hit a recent settlement low of $73.24 per barrel on December 12, having not settled above $80 per barrel since November 30. After that low point, Brent proceeded to rise in nine of the following 12 trading days, breaking back above the $80 mark on Tuesday with a $2.53 surge to $81.07. That marked a 10.7% increase from the early December lows.
Meanwhile, movement in ultra-low sulfur diesel (ULSD) futures lagged behind, reaching a settlement Tuesday of $2.6688 a gallon, up 6.4% from its December 12 closing price. The considerable gap in performance shows how the latest oil price surge has been led by crude markets with refined products slowly following.
Geopolitical Fears Cloud Outlook
Such crude-led gains, with products trailing behind, often occur when geopolitical tensions and fears of potential supply disruptions grip oil markets.
Recent attacks by Houthi rebels in Yemen on ships traversing the Red Sea and Suez Canal have sparked rerouting around South Africa’s Cape of Good Hope. Although this avoids danger, it adds seven to 12 days to steaming time and ties up global oil supplies.
While shipping leaders like A.P. Moller-Maersk have signaled preparations to resume Red Sea routes under new protection, many freight companies continue circumventing the hazardous shortcut. These long voyages delay oil cargo deliveries worldwide.
Shifting Market Dynamics
Beyond security issues, oil’s supply-demand balance also tilts bullish because the OPEC+ alliance is still curbing production substantially. As the economic drag from China’s COVID-19 crisis fades, the demand outlook strengthens further.
Refinery profitability metrics, however, have dropped in recent weeks, reducing incentives for capacity growth. The 3-2-1 crack spread measuring inputs of three crude barrels versus two of gasoline and one of diesel sank to $16.73 per barrel Tuesday, down from $20.43 a week earlier.
So while crude prices respond to broad market dynamics, product prices follow based on immediate supply-demand balances. This means diesel markets could lag if refining economics cools.
Outlook Hinges on Geopolitics
In summary, after an eight-week slide, U.S. diesel fuel prices turned up mildly amid shifting oil market sentiments. Investors reacted to increased geopolitical tensions threatening global supply flows.
But with refined product profitability declining as crude costs rise, diesel markets face uncertainty. The path forward depends largely on whether conflict and security risks continue to hamper the world’s key maritime oil routes. Any supply shortfalls could overpower weakening refinery margins to spark further diesel price gains.
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