The sliding market for oil led to a third straight decline Monday for the benchmark diesel price used for most fuel surcharges.

The Department of Energy/Energy Information Administration average weekly retail diesel price fell 1.1 cents a gallon to $3.768.

After four straight weeks of increases that followed nine consecutive weeks of declines, the DOE/EIA price had risen to $3.865 a gallon July 8. But the latest price puts it 9.7 cents below that.

Retail price moves generally lag futures and wholesale changes. The price of ultra low sulfur diesel (ULSD) last week on the CME commodity exchange rose early in the week only to fall back to end up mostly unchanged in the week, so a large move in the DOE/EIA benchmark would not have been expected.

However, the market recorded a further decline Monday. ULSD on the CME commodity exchange settled Monday at $2.375 a gallon. It’s the lowest settlement since June 7. Since a recent high settlement of $2.6343 on July 3, the price is down a little less than 26 cents a gallon.

In a commentary on the market Monday, John Kemp, the leading energy editor at Reuters, noted that the failure of data to show a strong pull on inventories is leading to much of the weakness.

“The peak summer consumption season has already passed the half-way point and there has been only a modest depletion of inventories so far,” Kemp wrote. “U.S. stocks of crude oil and refined fuels such as gasoline and diesel have remained close to long-term seasonal averages in recent weeks. Ample inventories have sapped some of the incipient bullishness among traders.”

Kemp also noted that month-to-month spreads haven’t reflected any tightening of inventories.

When inventories in the market tighten in any commodity market, the value of the first month traded relative to other months rises. In a perfectly balanced market, the first month traded, also known as the front month, will be the cheapest price along a timeline. The next month out is higher, and the next month beyond that is higher still. It’s a structure known as contango, and the increase from month to month reflects the cost of holding inventory and the time value of money.

When the front-month price is the highest, it is called backwardation and reflects the fact that in a tight market, that immediate delivery product is the most valuable.

ULSD had been in backwardation for months due to tight inventories. But the relationship between the first and second month moved into contango several weeks ago and remains there, reflecting that market with adequate inventories Kemp referred to in his article.

Excluding 2020 and 2021 when ULSD inventories were high because of the pandemic, the most recent EIA report of 115.39 million barrels of ULSD held in U.S. inventories for the week ended July 12 is in line with or even slightly higher than where stocks were reported by the EIA at this point in July over the past several years.

One potential bullish development was reported last week by S&P Global Commodity Insights, quoting a Russian news report.

According to SPGCI, Russia is studying a ban on diesel exports if there is a continued rise in domestic diesel prices in that country. The SPGCI report quoted Kommersant, a Russian newspaper.

The article noted that Russia, a major diesel supplier to the world, had banned exports last fall. But that effort had to be brought to an end because the country showed then it does not have enough storage capacity to hold that much supply that would have otherwise left the country.

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