Benchmark diesel down over 11 cents in 2 weeks; refineries at risk?
John Kingston
5 min read
The benchmark price used for fuel surcharges is almost down to its lowest level of the year. (Photo: Jim Allen\FreightWaves)
Against a backdrop of falling asset prices virtually across the board, the benchmark diesel price used for most fuel surcharges fell for the second week in a row.
The weekly average retail diesel price posted by the Department of Energy/Energy Information Administration declined 5.3 cents a gallon to $3.582.
Combined with last week’s drop of 6.2 cents a gallon, the price is now down 11.5 cents in just two weeks. It’s the biggest two-week decline since a Dec. 16-23, 2023, drop. It also puts the price just above the lowest level of the year, recorded on Jan. 6, of $3.561 a gallon.
With recession fears roiling Wall Street as the most visible sign of market worries, a commodity like oil, tied to economic activity, took a hit as well.
The settlement Monday on the ultra low sulfur diesel contract on the CME commodity exchange was $2.1799 a gallon. It’s the lowest ULSD settlement since Dec. 6, when the market settled at $2.1326. The price was down 3.61 cents a gallon for the day, a decline of 1.63%.
With the drop Monday, the price of ULSD is down 10.73 cents in just a week. Since a recent high settlement of $2.5034 a gallon on Feb. 20, it’s down 32.35 cents, suggesting retail prices still have a ways to go to catch up.
From the perspective of diesel buyers, the decline is nothing but good news across the board. For trucking companies, diesel costs are generally the second-largest cost of doing business after labor, though companies with robust fuel surcharge programs can push them down to shippers to varying degrees.
But another prospect was raised in a report Monday: that U.S. tariffs on imports in general and energy in particular might bring about retaliation. And for a U.S. refining industry that has become increasingly dependent on the export market for its success, that could result in long-term damage if not outright loss of capacity.
That was the argument put forth Monday by longtime energy economist Philip Verleger in his weekly report, “Notes at the Margin.”
In December, the latest month for which data is available, U.S. refiners exported about 3.7 million barrels a day of all finished petroleum products. A little more than 1 million barrels a day was finished motor gasoline. ULSD was about 1.3 million barrels a day.
Making a comparison to a ban on soybean exports by President Richard Nixon in 1973 in an effort to slow the price of food inflation in the U.S., Verleger said farmers today are still suffering from lost markets to growth in Brazilian soybean production that occurred as a result of the Nixon ban. It may have cost farmers as much as a trillion dollars since then, he added.
“US Gulf Coast oil refiners may suffer a similar hurt if President Trump maintains his aggressive tariffs,” Verleger wrote. “Reprisals by their best foreign customers could leave them begging as refiners in the Persian Gulf, Russia, and now China seize their markets.”
The U.S. Gulf Coast market has lost a significant refinery in recent weeks, as the LyondellBasel refinery closed. It was believed to be the oldest Gulf Coast refinery.
Verleger cited two recent reports by the energy consulting firm of Wood Mackenzie which came out before the tariff wars, saying that more than 20% of existing world refineries were at risk to be closed as new refineries worldwide open for business in the Middle East and Africa. Those reports did not see U.S. refineries as vulnerable, according to Verleger.
A new refinery in Nigeria, Dangote, has been described as “colossal” and is a direct competitor with U.S. refineries in the Atlantic basin.
But the Trump administration tariffs “may change that because the refiners located on what has been known for more than a century as the Gulf of Mexico rely heavily on product exports,” Verleger wrote. “These facilities may fall victim to retaliatory tariffs on those products.”
U.S. product exports are an economic strength, Verleger argues. They “comprise an arrow in the Trump administration’s energy dominance quiver,” he said in the report.
But there’s a downside: “They are also highly vulnerable because their key importers, Mexico and Europe, have governments preparing to retaliate against US tariffs,” Verleger said.
But like other projections that the East Coast might see a spike in product prices as a result of tariffs on Canadian energy imports, slated to be 10%, Verleger said the small U.S. East Coast refining sector might benefit from a trade war.
Verleger identified three significant East Coast refineries as examples of facilities that could benefit: the Bayway refinery in New Jersey, operated by Phillips66 (NYSE: PSX); the Delaware City, Delaware, refinery operated by PBF (NYSE: PBF); and the Monroe Energy refinery near Philadelphia, owned by Delta Airlines (NYSE: DAL). The EIA lists eight refineries in total in the East Coast region known as PADD1.
“The region relies on importing products from Canada, Europe, and the Gulf Coast,” Verleger wrote. “Product prices there will rise with tariffs as the pipeline capacity from the Gulf is limited. This will allow the eight PADD I refineries to realize higher margins.”
Ironically, even though fears have been raised that tariffs may have their first upward push on petroleum prices in New England and the U.S. Northeast, the region saw a smaller decline this week than the national average in the DOE/EIA report. But the tariffs are not in place yet.
The average diesel price in New England was $4.037 a gallon, down 0.6 cents. For the East Coast as a whole, it was down 5.3 cents a gallon, to $3.742.
