Diesel Futures Whipsaw 25 Cents as Refining Losses Keep Market Tight

Ultra-low sulfur diesel on the CME plunged 25.45 cents per gallon on the December contract in a single session this week, after loose talk of U.S.-Iran peace discussions circulated on social media. The next day it rebounded 10 to 11 cents, when Iranian officials said no agreement was any closer.

The weekly Department of Energy benchmark, published the morning of the interview that anchors this story, told a calmer tale: down $0.06 to $6.292 per gallon. The intraday futures swings told the real one. This is a market on a knife edge, and the volatility is not going away.

For carriers, brokers and shippers, that volatility reflects structural tightness that analysts say will outlast any diplomatic development. Roughly 10 million barrels per day of global refining capacity has been knocked offline by attacks in the Middle East and Ukraine. U.S. and international distillate inventories sit at extremely low levels heading into heating-oil season.

"The market is absolutely going to go down" if a genuine easing of conflict materializes, said John Kingston, who covers fuel markets. But he cautioned any relief would likely be short-lived.

"That doesn't take away from the fact that longer term, after that kind of almost sugar high has worn off, you have inventories to refill. You have facilities that have to be rebuilt," Kingston said.

What does backwardation signal?

Kingston pointed to diesel's continued steep backwardation — near-term prices exceeding future prices — as the clearest signal of how tight supplies are. In a well-supplied market, commodity prices rise gradually along the forward curve, a condition known as contango. Diesel's persistent reversal of that pattern means buyers are paying a premium for immediate delivery. Weekly EIA inventory data backs that dynamic up.

"The most valuable barrel out there is the one that can give you the product now, right now, because now is when we need it," Kingston said.

Jeffrey Currie, former head of commodities research at Goldman Sachs, separately observed that the Brent forward curve shows little price decline even a year out. That reflects deep uncertainty about when, or whether, supply-demand balances will normalize.

What do the refinery deals reveal?

Two major deals this week showed just how valuable processing capacity has become.

• Valero announced it would purchase the shuttered LyondellBasell refinery in Houston for roughly $350 million. The facility has been offline for about three years and holds more than 100,000 barrels per day of capacity.
• On the same day, Marathon said it was selling two operating Midwest refineries — in Minnesota and North Dakota — to a company identified as CVI for over $4 billion.

The stark price gap, Kingston noted, suggests the Houston facility will require substantial investment before it contributes to supply. An operating plant commands more than ten times the price of a cold one.

Who faces the sharpest exposure?

Heating oil consumers in the Northeast face the nearest-term risk. Heating oil and diesel are both distillates and trade in close correlation, so any diesel spike flows directly into home heating bills.

Supply itself is not the concern, Kingston said — the U.S. is a net exporter of distillates. Affordability is.

"They might go broke for the price," he said of households in New England that have no practical alternative to heating oil.

One possible offset: an El Niño weather pattern, which historically delivers warmer-than-usual winters to the Northeast, could reduce heating demand and ease pressure on distillate prices. That outcome remains uncertain.

For trucking and logistics operators budgeting fuel surcharges into 2024, the message is that headline calm can vanish in a single session. With 10 million barrels per day of refining capacity offline, inventories critically low, and heating season approaching, analysts expect the distillate market to stay fragile — and spike-prone — even if diplomacy delivers.