The U.S. retail diesel market made little moves last week, while the commodity market that underpins that retail price bounced up, down and around as the contract neared expiration.

After three weeks of hikes that saw the base price used for most fuel taxes rise by about 50 cents a gallon, the price reported Monday by the Department of Energy/Energy Information Administration fell 2.4 cents a gallon to $5.317. Even after last week’s big rally, the current price remains about 50 cents below the all-time high of $5.81 a gallon set on June 20.

Monday’s relatively small move followed days of wild swings in November contract prices for ultra-low sulfur diesel (USLD) on the CME commodity exchange.

Over the five days last week, on Oct. 24, ULSD rose 6.7 cents per gallon and then rose 9.63, 4.71, 15.29 and 21.38, respectively. That was followed Monday by a market plunge of 58.84 cents a gallon on the last day of the November contract. Four days of price increases in November pushed the ULSD price up 72.51 cents a gallon, much of which was returned on Monday.

Meanwhile, the December ULSD contract, which is the second month of trading in October, rose only about 18 cents between Monday and Friday. This kind of market movement is seen in a short squeeze, when a large number of traders with short positions – bets that the market will fall – find themselves instead facing a rising market with the expiration of the contract they are holding on the horizon.

When the squeeze ends, the price that was going down will usually fall hard and fast. That’s what happened on Monday with ULSD’s big drop in November when it came off the board.

Hedging these shorts is increasingly costing a lot of money, as seen not only in the November ULSD price on the CME, but also in the widening spread between November and December.

The November ULSD on October 21 was 27.06 cents per gallon higher than the December ULSD. When the situation settled that Friday, with pressure in full force, that spread was more than 80 cents a gallon. After Monday’s big drop that didn’t match the December contract — which was down just 7.14 cents on the day — the spread came off the board at 51.68 cents a gallon.

An increase of nearly 20 cents between Oct. 21 and Friday in the December contract, which was not as tight as November, ended up being bigger than the relatively tame rise in wholesale diesel prices, reflected in FreightWaves’ ULSDR.USA data series SONAR. The ULSDR.USA national average wholesale price was $4.311 a gallon on Monday, up a little less than 12 cents from $4.192 on Oct. 21.

Moving forward, with the squeeze now out of the way, the focus will continue to be on limited inventory levels. The national business media picked up on the fact that the daily coverage for all non-reactive distillates in the US, a category that makes up 85% to 90% of diesel, is less than 26 days, well below normal for this time of year. This has sometimes been interpreted as meaning that the US will run out of diesel fuel in 26 days.

But that means stocks could cover demand for 26 days if all imports stopped and refineries shut down all production. U.S. refiners pump out about 5 million bpd of ULSD, with imports adding about 100,000 bpd to that.

The problem is that demand for domestic consumption plus exports exceeds the level of supply, which reduces inventory levels and raises prices.

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