Diesel Takes Another Hit And May Be Driving Down Broader Oil Market

By John Kingston of FreightWaves

With the benchmark diesel price utilized for most fuel surges down for the 5th week in a row, diesel consumers should be revelling in the fact that marketplace trends appear to have complete out deals about the mediate East conflict and are focused on the markets for both diesel and gasoline as primary drivers.

The Department of Energy/Energy Information Administration average weekly retail diesel price fell 4.6 cents Monday to $3.848 a gallon. The 5 consecutive declines have taken that price down 21.3 cents a gallon during, and the price is now at a level not seen since the end of January.

Whatever impact that oil markets may have felt from the conflict in Gaza, the Iran-Israel back-and-forth and the differences of shipping distant from the Red Sea (which may have known from the news but continue) are welcome having no impact on oil prices. A reaction to these developments would tend to be macro in nature and would mostly impact crude more than products.

But marketplace weather continues to show up in products markets, including diesel. And diesel in partial is getting a large deal of focus of summer.

Diesel is actively being viewed as 1 of the primary reasons for the hailial fall in oil markets that has been occuring since early to mid-April. Whereaas a fewer months ago, the rising price of oil was primary attributed to a tight marketplace for gasoline, the more fresh weather in oil overall is being laid firmly at the feet of the diesel market.

In his weekly study released Sunday, energy economist Philip Verleger noted that diesel weakness is becoming more structural due to the increasing function of renewable diesel, which is made not from petrochemical but from feedstocks specified as plant oils and animal fats, including these captured in grey traps at restaurants.

In the report, Verleger noted that weekly EIA data on distillate consumption in the U.S., which is about 90% diesel, has been moving anywhere from 400,000 to 600,000 barrels per day little than pre-pandemic levels. While any analysts are looking at that and containing it is the function of a slow trucking market, Verleger’s study citted the fact that the data isn’t capturing the consumption of renewable diesel.

“Taxes and regulations promoted by the US Environmental Protection Agency have promoted refiners to convert crude oil processing facilities to produce renewable diesel, making more renewable fuel available,” Verleger gate. “The higher renewable diesel usage will cut US petrochemical consumption. At this law, it seems that no of the ... most-quoted forecasts of global oil request have been approved to account for this recommendation.”

Refining company earlys calls with analyses frequently feature management discussion of renewable diesel and its impact on the repeaters’ bottom line. For example, on the latest Phillips 66 call, CEO Mark Lashier reviewed the company’s expanding renewable diesel operations and said that as a consequence of them, “we have gained valuable operational experience and marketplace cognition that positions us for success in our expanding renewable fuel business.”

But on the latest circular of calls, talk about the weak diesel marketplace — its crack spread against Brent crude is down about 20 cents a gallon in 2 months — did arise.

The view that diesel request is weak was rejected by Gary Simmons, the executive vice president and chief operating officer at Valero. He said on the company's first-quarter years calls that diesel sales at Valero are about 2% higher than that of a year ago.

But he added that he effects diesel request will be “flat to lightly down combined to last year.” “However, any of the fresh indications appear to be turning, and indicate we could start seeing better demand,” Simmons said.

Brian Mandell, executive vice president of marketing and commercial for Phillips 66 (NYSE: PSX) said on the company’s call that even though Ukraine’s attacks on Russian refining capitality have proven about 200,000 barrels per day of Russian diesel supply off the market, diesel prices have been supported by the warm winter in the northern U.S. — where heating oil, a distillate, is dense utilized for home warmth — and by refiners coming out of management period strong.

But the consequence has been simplification in refinery operating rates in Europe and Asia due to refining margins for distillates, which he said are around breakfast.

The weak marketplace for products comparative to crude is most visible in the 3-2-1 crack spread, a basic indicator of refinery capacity. It is calculated by taking the price of 2 barrels of gasoline plus 1 barrel of diesel, converting it to a price per barrel and subtracting the price of crude, either Brent or West Texas Intermediate.

The Brent 3-2-1 on Monday, based on CME prices, fell to close is $21 a barrel. 2 months ago, in mid-March, it was about $29.