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The benchmark diesel price used for most fuel surcharges rose Monday by more than any increase since June.
The Department of Energy/Energy Information Administration average weekly retail price climbed 5.8 cents a gallon to $3.561. It was the highest increase since a more than 7-cents-a-gallon rise on June 17. But after that increase, the benchmark was $3.735, 17.4 cents more than the price posted Monday.
The increase follows several days of trading in the ultra low sulfur diesel (ULSD) contract on the CME commodity exchange that have significantly pushed up the futures price of ULSD.
From a settlement on Dec. 26 of $2.2053 a gallon, the price of ULSD rose over five trading days to settle Friday at $2.36. It pulled back slightly Monday to settle at $2.3552.
While futures moves don’t immediately impact retail prices, they do have a quick effect on wholesale prices. The rate of effect on those wholesale numbers and retail prices is not a firm relationship and could take weeks to play out.
Along with that increase in the outright price is a notable change in the spread between the first- and second-month contracts on the ULSD contract.
That spread has been in a structure known as contango for months. (FreightWaves data is incomplete on the second month settlement and how long the contango was in place.)
In a contango, the second-month settlement has a price higher than the first month. In a perfectly balanced market relative to supply and demand, this is the normal structure, as the higher cost for later-month delivery – for example, July relative to June – reflects the cost of storage and the time value of money.
A price for an “out” month does not reflect what traders believe prices will be when that month rolls around on the calendar. Rather, it is a complex brew of interest rates and the cost of storage, but more importantly, it is a signal of the level of inventories.
The inverse of a contango is called backwardation. In a backwardation, “out’ months are higher, and one of the reasons is a tightening of inventories. The tighter the inventories, the more demand there is for product to be delivered sooner rather than later.
Settlements on the ULSD contract the last three trading days of last week – New Year’s Eve as well as Thursday and Friday – flipped into backwardation. The second-month settlement for Monday’s market was not immediately available, but the data suggests it remained in backwardation to start the week.
The irony is that the move to backwardation – suggesting tighter inventories – came as the EIA last week reported a significant build in inventories for all distillates including diesel, but excluding jet fuel, which is also a distillate. That figure rose to 122.9 million barrels from 116.5 million barrels the week before, putting it solidly above recent averages for this time of year.