Diesel Prices Climb: 3 Key Reasons for Rising Costs Despite Drop in Futures
Tia Amin
Table of Contents
On Monday, diesel prices defied falling futures, with the benchmark rate used for fuel surcharges inching upward. This increase occurred as restraint in Israeli military activity in key areas allowed market stabilization, reducing certain bullish pressures that had previously impacted the market.
The Department of Energy (DOE) and Energy Information Administration (EIA) reported a 2-cent increase in the average retail diesel price, now at $3.573 per gallon. This rise comes after a notable decline of 7.8 cents the previous week, marking the fifth week of fluctuations following a recent period of growth. The recent volatility highlights the sensitivity of diesel prices to geopolitical tensions and market speculation.
Diesel Prices: Notable Decline in Ultra Low Sulfur Diesel Futures
The CME exchange recorded a notable decline in ultra-low sulfur diesel (ULSD) futures, closing at $2.1286 per gallon—down 10.95 cents. This was one of the sharpest declines since December 2023 when prices dropped by 16.9 cents, or 5.97%. Monday’s decrease, at 4.89%, reflects considerable market movement, with the last low seen in September at $2.0538 per gallon.
Impact of Israeli-Iranian Tensions on Oil Markets
The recent restraint shown by Israel in avoiding attacks on Iranian oil facilities has lessened immediate fears of supply disruptions. Traders had initially anticipated that Israeli military actions might impact Iranian oil production; however, restraint on both production and nuclear sites has led to fewer price fluctuations.
Bloomberg emphasized how speculative bets in oil options, which would have benefited from an escalation in conflict, lost value due to unexpected market stabilization. These options, tied to West Texas Intermediate crude, settled at $67.38 per barrel. Approximately 800,000 Brent December call options became unprofitable as traders’ interest in spike protection diminished following the news of restrained military actions.
Forecasts Suggest Limited Market Support
With geopolitical tensions temporarily stabilized, oil prices face minimal upward pressure. On Monday, Brent crude fell by $4.63 a barrel—a 6.09% drop, marking the largest decline since mid-2022. Despite the bearish sentiment, a potentially bullish outlook was expressed by Amrita Sen, director of research at Energy Aspects. She cautioned against over-reliance on non-OPEC countries for production increases through 2025.
While forecasts have indicated significant production boosts from the U.S., Brazil, Guyana, and Canada, Sen pointed out that actual production has lagged behind expectations. Current gains hover just above 300,000 barrels per day, falling short of the forecasted 1 million barrels per day, indicating underperformance among these nations.
U.S. and Libyan Production Levels Shape Future Output
As of the end of 2023, U.S. crude production was reported at 13.308 million barrels per day, according to EIA’s monthly report. In recent weeks, production figures have reached record levels, peaking at 13.5 million barrels per day. However, it may take until the December EIA report to confirm or adjust this figure.
On the other hand, Libya’s production has introduced a bearish influence in the market. The National Oil Corp. announced a daily output reaching 1.327 million barrels—the highest level in several years. This increase surpasses previous estimates and adds significant supply to the market, potentially affecting oil prices further.
Conclusion
In summary, while diesel surcharges are inching upward, the interplay of geopolitical tensions, production forecasts from non-OPEC producers, and the resurgence of Libyan output suggest a potential for stabilized or even reduced prices in the near term. The complex dynamics of the oil and diesel markets will likely continue to evolve, influenced by both external events and internal production capacities. Stakeholders must remain vigilant to these shifts, as they could significantly impact pricing strategies and market behaviors in the coming months.