Factors affecting diesel prices

The retail price of a gallon of diesel fuel reflects the costs and profits (or losses) of producing and delivering the product to customers. Four main components contribute to the retail price of a gallon of diesel fuel:

• The cost of crude oil purchased by refineries
• Refining costs and profits
• Distribution, marketing, and retail station costs and profits
• Taxes (federal, state, county, and local government

Oil fell as lock downs across China countered looming European Union measures to limit purchases of Russian fuel. West Texas Intermediate settled near $102 on Tuesday after a session marked by low liquidity. Crude has swung within a $15 band in the last three weeks as the market weighs the hit to demand from China’s Covid wave against supply concerns stemming from bans on Russian crude. Investors are also bracing for the biggest U.S. rate hike since 2000, which could slow demand. “Crude is trading sideways as we await further details from the EU on what an Russian oil ban will look like,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management. “Demand concerns are in the back of everyone’s mind keeping upside capped for the moment.”

Since spiking after Russia’s invasion of Ukraine, oil has struggled to make further headway. A combination of lower demand in China and reduced supply from Russia has led to a period of volatility that’s boosted the cost of trading and forced some in the market to the sidelines. The wild swings could be set to continue, BP Plc said Tuesday. “We’ve got low-ish stocks around the world, we’ve got low-ish spare capacity around the world and have a lot of uncertainty,” Chief Executive Officer Bernard Looney said in a Bloomberg Television interview. “All of these things lead to a lot of volatility and we can expect that volatility to continue.”

For now, the most extreme pocket of tightness in the oil market is in diesel. Record fuel exports from the U.S. Gulf Coast are draining local supplies, pushing diesel margins to the record high levels. Retail prices have peaked in recent days.

While prices have dipped due to concerns about lower demand, longer-term signals point to an under supplied oil market. About 1 million barrels a day of Russian crude are offline, a number that could double this month, Looney said.

Additionally, the European Commission is set to proposed a ban on Russian oil by the end of the year, with curbs on imports introduced gradually until then. And later this week, the OPEC+ alliance is likely to ratify its planned supply increase despite having added just 10,000 barrels a day in April, compared with a scheduled 274,000 a day, the survey showed.

Fueling Strategy: Please fuel as needed today/tonight~Be Safe

A measure of diesel’s future’s premium over crude futures –the diesel crack spread– shot up on Monday to reach a fresh high dating back to 1986. Diesel’s strength relative to crude is rooted in depleting supplies around the world as countries cut back on Russian fuel. “The imbalance of Diesel demand versus supply worldwide is keeping buyers active on any weakness in crude,” said Dennis Kissler, Senior Vice President of Trading, BOK Financial.

While in recent sessions prices have dipped due to concerns about lower demand, longer-term signals point to an under supplied oil market. The OPEC+ alliance is likely to ratify.  its planned supply increase later this week, despite having managed to increase its production by only 10% in March. Meanwhile, the European Union is set to propose a ban on Russian imports by the end of the year, and Germany said it could end its dependence on Russia by summer.

Oil climbed for a fifth month in April, marking the longest monthly winning streak since January 2018. Russia’s invasion of Ukraine has spurred inflation, and led the U.S. and its allies last month to agree on a coordinated release of strategic crude reserves to ease surging energy prices. The war has also sparked a rally in diesel prices in the U.S.

Beijing has closed close gyms and cinemas over the Labor holiday that lasts through Wednesday. Lockdowns persist in Shanghai, though there are cautious signs the financial hub’s outbreak is starting to ease. China oil demand is down more than 1 million barrels per day year-to-date and “doesn’t look like that’s going to come back anytime soon,” Ed Morse, Citigroup global head of commodity research, says on Bloomberg Television. He added that in the U.S., gasoline consumption has stalled.

Oil futures finished higher Thursday after The Wall Street Journal reported that Germany was prepared to stop buying Russian crude, clearing the way for a European Union embargo.

Oil has seen choppy trading, with a soaring U.S. dollar weighing on commodity prices as investors also assessed worries about the impact of COVID on China’s economy.

Oil dropped at the start of the week on concerns that a spreading Covid-19 outbreak in China will impact consumption even further. West Texas Intermediate futures fell 3.5% to close below $100 a barrel. Rising coronavirus cases in Beijing sparked jitters about an unprecedented lock down of the capital, while Shanghai reported record daily deaths over the weekend. The world’s biggest crude importer is heading for the worst oil demand shock since the early days of the pandemic.

China’s travails with Covid-19 add another source of volatility to an oil market that’s been buffeted by Russia’s invasion of Ukraine. The war has fanned inflation, and the European Union is discussing measures to restrict  oil imports from Russia, matching steps taken by the U.S. and U.K. Potential demand destruction from China lock downs “is the number one issue in the market right now,” said Bob Yawger, director of the futures division at Mizuho Securities USA. Demand is down 1.2 million barrels a day since the lock downs in Shanghai began, and a shutdown of the capital could impact demand even more so, he added.

China has implemented lockdowns in a number of cities as it pursues a Covid Zero strategy. In Beijing, the government has expanded testing to 12 districts from April 26-30. China’s oil demand averaged 13.3 million barrels a day in March, according to data compiled by Bloomberg.

The U.S. oil benchmark remains about 35% higher this year, despite recent weakness. The market is poised for additional supply, adding to bearish signs. Libya is expected to resume output from shuttered fields in the coming days, while the CPC oil terminal on Russia’s Black Sea coast has resumed regular operations after one of two moorings damaged in a storm was repaired.

Easing supply fears have helped push Brent’s prompt spread — the gap between its two nearest contracts — to its weakest since late last year, excluding expiration days.

Have a Great Day,