Diesel Prices Continue to Rise Amidst Oil Market Volatility

The benchmark price used for most fuel surcharges rose for the third week in a row, with an increase of 4.1 cents per gallon in the average benchmark retail diesel price posted Monday. This significant rise brings the weekly Department of Energy/Energy Information Administration price to $3.602 a gallon, marking its highest level since October and the third consecutive week of an increase.

The recent surge in diesel prices is part of a broader trend that has seen oil prices turn around sharply after weeks of mostly downward drift. Several factors have contributed to this sharp turnaround, including the imposition of new sanctions on Russian shipments of oil by the Biden administration, along with the United Kingdom. These sanctions, which went further than expected according to a report from Morgan Stanley, are being seen as the primary driver of a sharp two-day upturn in oil prices on futures markets.

According to a report from S&P Global Commodity Insights, the sanctions hit key Russian oil producers Gazprom Neft and Surgutneftegas, as well as a wide range of ships, oil service equipment companies, and insurance companies. The analyst quoted by S&P Global Commodity Insights, Rahul Kapoor, head of Shipping Analytics and Research, noted that "with so many ships sanctioned, along with traders, charterers, and marine insurers, this set of sanctions will in all probability dent near-term Russian oil flows into Asia, particularly India and China."

The sharp increase in diesel prices is also being driven by the spread between ULSD (Ultra Low Sulfur Diesel) and Brent crude. This spread has widened considerably in recent weeks, coinciding with a winter that so far is the coldest in several years worldwide. The comparison of the front-month spread between ULSD and Brent shows that the spread has exceeded 60 cents a gallon on the last two trading days.

The impact of cold weather can be seen in the report from Bloomberg last week, which noted that global prices of liquefied natural gas had risen above the price of oil on an energy-equivalent basis. This is a rare condition, with the premium being "substantial," paving the way for major consumers to shift to cheaper but dirtier fuels.

This shift could have significant implications for the market, as it would lead to increased demand for fuel oil and diesel. Fuel oil is the heaviest and dirtiest product that comes from the refining process, while heating oil or diesel may also be used in some applications when users switch out of natural gas and into oil.

The sharp increase in diesel prices has significant implications for industries that rely on diesel fuel, including transportation and logistics. The impact of these price increases will continue to be felt in the coming weeks as the market adjusts to the new sanctions and the changing dynamics of global oil supply and demand.

Impact on Industries Reliant on Diesel Fuel

The sharp increase in diesel prices has significant implications for industries that rely on diesel fuel, including transportation and logistics. These industries are already feeling the pinch from the price increases, with some companies struggling to maintain their profit margins.

The transportation industry is particularly vulnerable to changes in diesel prices, as it accounts for a significant portion of their operating costs. With diesel prices continuing to rise, transportation companies may be forced to pass on these increased costs to their customers, leading to higher shipping rates and potentially reduced demand.

Logistics providers are also feeling the impact of the price increases, as they rely heavily on diesel fuel for their operations. The increased cost of diesel is being passed on to shippers in the form of higher freight rates, making it more expensive for companies to move goods around the country.

Winter Weather and Diesel Prices

The sharp increase in diesel prices is also being driven by the spread between ULSD (Ultra Low Sulfur Diesel) and Brent crude. This spread has widened considerably in recent weeks, coinciding with a winter that so far is the coldest in several years worldwide. The comparison of the front-month spread between ULSD and Brent shows that the spread has exceeded 60 cents a gallon on the last two trading days.

The impact of cold weather can be seen in the report from Bloomberg last week, which noted that global prices of liquefied natural gas had risen above the price of oil on an energy-equivalent basis. This is a rare condition, with the premium being "substantial," paving the way for major consumers to shift to cheaper but dirtier fuels.

This shift could have significant implications for the market, as it would lead to increased demand for fuel oil and diesel. Fuel oil is the heaviest and dirtiest product that comes from the refining process, while heating oil or diesel may also be used in some applications when users switch out of natural gas and into oil.

Conclusion

The benchmark price used for most fuel surcharges rose for the third week in a row, with an increase of 4.1 cents per gallon in the average benchmark retail diesel price posted Monday. This significant rise brings the weekly Department of Energy/Energy Information Administration price to $3.602 a gallon, marking its highest level since October and the third consecutive week of an increase.

The recent surge in diesel prices is part of a broader trend that has seen oil prices turn around sharply after weeks of mostly downward drift. Several factors have contributed to this sharp turnaround, including the imposition of new sanctions on Russian shipments of oil by the Biden administration, along with the United Kingdom.

The impact of these price increases will continue to be felt in the coming weeks as the market adjusts to the new sanctions and the changing dynamics of global oil supply and demand.