Diesel still ripping higher than the rest of the barrel; here’s why

Beyond looking out the windshield and seeing retail diesel prices that once again are rising, here are some key comparisons that a consumer dealing with those higher numbers should know. On February 27, the last day before military action began between Iran on one side and the U. S.

and Israel on the other, the price of international crude benchmark Brent settled at $72. 48/barrel on the CME commodity exchange. On the same day, ultra low sulfur diesel (ULSD) settled at $2. 596/gallon. On Wednesday, Brent settled at $91. 62/b. ULSD settled at $4. 4523/g. The math: since the start of the war, Brent is up 26. 4%. ULSD is up 71. 5%.

(Thursday’s settlement was $4. 4803/g.) On CME, the contract for RBOB, an intermediate product that serves as a proxy for gasoline, had risen 56. 5% since the Iran war began. It’s a lot more than Brent, but less than diesel.

But it’s that yawning gap between crude and diesel that is bringing broad attention to the price of the fuel, driven in part by fleets frustrated to hear reports of crude rising slowly or even falling while their own fuel costs most definitely are not.

Diesel is even taking the spotlight from gasoline, which as a product consumed by far more people than diesel generally draws the most attention from the media, politicians and general consumers. The shift to the world focusing on diesel prices was encapsulated in the title of a recent article on Axios: “Diesel desperation is mounting.”

There has been no stronger consistent voice on the rising diesel market and what it means for the broader energy picture than Jeffrey Currie, former head of commodities at Goldman Sachs and now involved in several different businesses.

He’s done numerous television interviews, including one this week on CNBC where he noted the disconnect between crude and product prices as being historic. “Nobody consumes crude oil but refineries,” he said. “To everybody else on the planet Earth, what matters are the product prices.”

Historically, Currie said, the spread between product prices and crude prices was “relatively stable.” But on a day when Brent was trading at about $87/b, Currie noted that diesel in European trading was about $170/b. “Crude is nearly half the price of the products,” Currie said.

“So those relationships, those econometric models, everybody that’s been making that assumption that the spread between oil and products is a relatively stable constant relationship have missed out.” A gigantic gap Beyond the percentage increase, there are other ways of measuring the current disconnect.

The crack spread is the measure of taking a barrel of crude and turning it into products. There are multiple ways it can be calculated. But a simple way to emphasize the diesel strength is to take the second month price of ULSD on CME and compare it to the first month Brent price, since the latter can be refined into the former.

On February 27, the final day of trading before the Iran war started, the spread was about $36. 55/b. On the first two days of this week, it crossed $90/b for the first time since the war began, and likely for the first time in history.

Crude settled at $91/b that day, driving home what Currie said in his CNBC interview: crude is about half the value of ULSD. (The spread fell slightly below that $90 mark Wednesday.) The end result at the pump is that average U. S. retail diesel prices, as measured daily by the AAA, were at $5. 5477/g Thursday, within 15 cents of the post-war high of $5.

5689/g set April 9 and up more than 25 cts/g since August 10, when the latest run of higher retail prices began. The question then is why since the Iran war began has diesel reacted to the whole range of bullish market factors more than crude and more than gasoline. The list is a long one.

Cutbacks in Russia: With so much focus on the Middle East and the Strait of Hormuz, the impact on diesel from Ukrainian attacks on Russia’s refining infrastructure–which is heavily engineered to produce a strong diesel yield–had initially not received significant attention. But that has changed.

The International Energy Agency, in its monthly report for July, detailed some of the impact from the drone attacks. As that report came out a month ago, the situation has only gotten worse from the perspective of the diesel market.

“Trade data show that exports have nearly halved in recent weeks, following the intensification of attacks by Ukrainian forces on Russian refineries,” the IEA said. In July, the IEA estimated Russian refining runs were down 1. 6 million b/d year-on-year because of the attacks.

“In conjunction with the attack on Russian storage sites and infrastructure, this loss of product output has reportedly caused widespread domestic fuel shortages and led to a temporary ban on diesel exports,” the IEA said.

More recently, energy consulting and information firm RBN Energy estimated that crude runs in Russia had dropped from more than 5 million b/d last year to around 3. 8 million b/d in July, which it said was