Near-$70/barrel crude oil prices are nudging diesel prices back up, and the transition to ultra low sulfur diesel (ULSD) will likely bring a second wind to that trend, according to an expert at the Oil Price Information Service (OPIS).
Ironically these historically high crude oil prices come at a time when energy supplies are well above the average range. According to the Energy Information Administration, on week ending March 31 crude oil stocks in the U.S. were at the 342.8 million barrel level. This reflects a 2.1-million barrel increase over the previous week and a healthy 25.7-million barrel premium compared to the same week last year.
For distillate—the petroleum product from which diesel is derived—the story is similar. On that week inventories were at the 121.6 million barrel level. Although that was a 2.6-million barrel drop over the prior week, it was a 17.5 million premium over the same week last year.
But price is another story. For the week ending April 2, the national average for a gallon of diesel was $2.617—31.4 cents above the same week last year.
According to Denton Cinquegrana, OPIS market editor, high crude oil prices and insufficient refining capacity negated the benefits of an unusually comfortable supply trend. And as the EPA-mandated June 1 start date for refineries to produce ULSD draws nearer he expects the transition will translate to still higher diesel prices.
“In the coming weeks you’re going to see [ULSD] have an impact on retail prices,” Cinquegrana told FleetOwner. “Maybe [refiners] have the capacity to make the ULSD, but when you have these transitions it creates nervousness in the market. The uncertainty going forward when there’s a spec change will lead to higher prices.”
An executive at ConnocoPhillips said last month he expects it will cost between 1.5 to five cents per gallon more to produce ULSD. However, LTL giant YRC Worldwide is anticipating that some spot markets will see a 10 to 20-cent premium because of shortages of on-spec ULSD around Oct. 15, when retailers will be required to provide ULSD with no more than 15 parts per million of sulfur.
“Right now diesel is about 10 cents more [expensive] than gasoline,” Cinquegrana said. “Diesel will remain higher than gasoline at the retail level. We’ll get closer to that $3 mark this summer. I don’t think we’ll surpass those levels. It’s pretty certain we’ll get close to $3 for diesel. If we do top it, it’ll probably be briefly. As always, during the summer there will be some panicking until cool heads in the marketplace prevail.”