On the back of an increase in diesel futures prices that has risen more than 13 cents/gallon in less than two weeks, the benchmark price used to set most fuel surcharges rose Monday for just the second time in nine weeks.
The Department of Energy/Energy Information Administration average retail price increased by 2 cts/g Monday to $3.471/g. It brings the price up from its prior week which had been a milestone: the June 2 price was the lowest since September 2021.
The increase Monday, announced Tuesday morning by the DOE/EIA, was just the second increase in the last nine weeks. That run of falling prices began with the benchmark at $3.639/g on April 7, so that the latest price is still down 16.8 cts/g during that stretch.
Oil prices in general have been moving higher in recent trading. Brent crude, the global crude benchmark, settled at $60.94/barrel on May 29. It rose five out of the next seven days to settle Monday at $65.29. The increases were continuing Tuesday. At approximately 10 a.m. Eastern, Brent had risen another 2% to $66.65/b.
Ultra low sulfur diesel (ULSD) futures prices, which had been trailing crude in recent weeks, strengthened slightly more than Brent during that time, tacking on another roughly 2 cts/g in the spread between the price of ULSD and Brent.
Market analysts are citing the undercurrent of trade talks between the U.S. and China, and the prospect of avoiding an even-wider trade war, as reasons for bullishness.
The bear case for prices is based on the forecasts by agencies such as the International Energy Agency that global oil demand may struggle to add even 1 million b/d this year, a historically low number. Paired with that is the OPEC+ determination to continue unwinding output cuts that have been in effect since spring of last year, despite the supply/demand models that would seem to suggest such supply would swamp a market with such weak forecasts of demand increases this year.
The other side points to the structure of the market and its unrelenting backwardation.
In a perfectly balanced market, the price of oil going forward–or any commodity–increases with the calendar. The July market for ULSD, which is the first month currently being traded, would have a lower price than August, August would be lower than September, and so on. The structure is called contango and the rising price reflects the cost of storage and the time value of money.
The opposite is backwardation, where the nearest month price is the highest price. The next month is less than that, and the next month is lower still. That structure reflects the fact that the most nearby barrel is the most valuable because of tight inventories.
The backwardation in the ULSD market actually has headed the other way, with the backwardation narrowing, suggesting an easing of tight inventories.
On May 15, the spread between the first month and second month ULSD was about 5.5 cts/g. On Monday, the spread settled at 1.75 cents, with the July contract worth that much more than August.
Diesel futures prices, which had been trailing crude in recent weeks, strengthened slightly more than Brent during that time, tacking on another roughly 2 cts/g in the spread between the price of ULSD and Brent.
The ULSD market actually has headed the other way. On May 15, the spread between the first month and second month ULSD was about 5.5 cts/g. On Monday, the spread settled at 1.75 cents, with the July contract worth that much more than August.
But in the Brent market, the spread between first month Brent and six months out widened Monday to more than $2/b. It is a spread that has been all over the map, from $2.85/b on April 17, down to 22 cts/b on May 5 and then back out to more than $2/b Monday, only the fifth time since the start of May that it has exceeded that level.
The backwardation is being cited by bulls as the basis for their view that the “swamping” of oil markets by the increase in OPEC+ oil is not going to result in a sharp decline in price. Part of that view is that there are increasing signs of at least a temporary plateau in oil output in various parts of the world beyond OPEC+.
An article in the Financial Times summed up that view. “Big companies from non-cartel countries such as ExxonMobil, Shell and BP have of late found relatively few new oilfields,” the article said. “Over the past five years, new non-shale discoveries have averaged at 2.5bn barrels a year — less than a quarter of the level of the previous three years, according to a Goldman Sachs analysis of the top projects in the sector. Given the long lead times between drill bit success and production, oil majors are still growing output from earlier discoveries. But, after 2027, pumping from conventional projects will start to fall. Similarly, US shale oil, which has been a huge driver of supply growth, is expected to peak in 2027, according to the US Energy Information Administration, and then start to decline.”
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