The U.S. retail diesel market made minor moves last week while the commodity market that serves as the foundation for that retail price whipped up, down and around as contract expiration neared.

After three weeks of increases that took the benchmark price used for most fuel surcharges up by about 50 cents per gallon, the price announced Monday by the Department of Energy/Energy Information Administration fell 2.4 cents per gallon to $5.317. Even after the big increases of the past week, the current price remains about 50 cents less than its all-time high of $5.81 a gallon set on June 20.

The relatively small move Monday came after several days of wild gyrations in the November contract price of ultra-low sulfur diesel (USLD) on the CME commodity exchange. 

In the five days of the past week, ULSD rose 6.7 cents per gallon October 24, followed by increases of 9.63, 4.71, 15.29 and 21.38, respectively. That was followed Monday by a plummeting market of 58.84 cents per gallon on the final day of the November contract. The four days of increases took November ULSD up 72.51 cents a gallon, with a good chunk of that being given back Monday.

Meanwhile, between Monday and Friday, the December ULSD contract, which is the second traded month during October, only rose about 18 cents. That kind of market movement is seen in a short squeeze, when a large number of traders with short positions — bets that the market will decline — find themselves instead facing a rising market with the expiration of the contract they are in on the horizon. 

When a squeeze ends, the price that has been getting squeezed will generally fall hard and fast. That is what occurred Monday with the big drop in November ULSD as it went “off the board.” 

Getting those shorts covered increasingly costs a great deal of money, which can be seen not only in the outright price of November ULSD on CME but in the growing spread between November and December. 

November ULSD settled Oct, 21 at 27.06 cents per gallon more than December ULSD. When it settled that Friday, with the squeeze in full force that spread was more than 80 cents a gallon. After the big decline Monday that was not matched by the December contract — which was down just 7.14 cents on the day — the spread went off the board at 51.68 cents a gallon.

The almost 20-cent increase between Oct. 21 and Friday in the December contract, which was not getting squeezed like November, ended up being more than the relatively tame increase in wholesale diesel prices reflected in the ULSDR.USA data series in FreightWaves SONAR. The national average wholesale price per ULSDR.USA came in at $4.311 per gallon Monday, up just a bit less than 12 cents from the $4.192 price of Oct. 21.

Moving forward, with the squeeze now out of the way, the focus will continue to be on tight inventory levels. The national business media has picked up on the fact that days cover for all non-jet distillates in the U.S., a category that is 85% to 90% diesel, is at less than 26 days cover, far below normal at this time of year. The interpretation of that has sometimes been that the U.S. is going to run out of diesel in 26 days.

But what it means is that inventories could cover 26 days’ worth of demand if all imports stopped and refineries halted all production. U.S. refineries are pumping out a healthy level of about 5 million barrels per day (b/d) of ULSD, and imports are adding about 100,000 b/d of supply to that. 

The problem is that demand for domestic consumption plus exports is exceeding those supply levels, tightening the inventory levels and boosting prices.

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