Between the DOE/Energy Information Administration high of $5.81 a gallon on June 20 and a recent low of $4.836 a gallon two weeks ago, the base price of diesel fuel, which is used for most fuel taxes, fell more than 97 cents a gallon .

He has now made back more than half of that.

The latest DOE/EIA price is $5.339 per gallon as of Monday. This was an increase of 11.5 cents per gallon, which complements last week’s increase of 38.8 cents per gallon. That is, a two-week increase of 50.3 cents.

Retail diesel sales appeared to respond mainly to a 79.71 cent gain in CME Ultra Low Sulfur Diesel (ULSD) for the week of Oct. 3. This rally was followed by a relatively volatile week on the CME Commodity Exchange last week. eventually, prices for the week closed not far from where they started the week, ending at $3.9802 per gallon.

But with the usual lag in retail prices, the increase of more than 50 cents in the last two DOE/EIA issues can be seen as a reaction to earlier increases.

ULSD on the CME added another 10.5 cents in Monday trading. More significantly, the 2.64% gain on the day came as global benchmark Brent was little changed.

Diesel’s continued strength against both crude oil and gasoline is beginning to suggest a possible permanent realignment of what is considered the “normal” spread between crude oil and diesel.

If it were only a matter of limiting the capacity of the oil refinery, the gap between the prices of gasoline and diesel fuel would be relatively stable. But as you can see on the pump, the gap between them has widened this year.

You can also see this in the futures market. The most indicative figures of the CME commodity exchange are obtained by comparing two spreads. One is between Brent crude oil – the international benchmark – and RBOB gasoline, an unrefined gasoline product that serves as a substitute for gasoline in commodity trading, and the spread between Brent and ULSD.

In 2019, the average spread between the Brent gasoline spread and the Brent-ULSD spread was about $9 per gallon, with the ULSD spread being much larger than the gasoline spread. Excluding 2020, because the pandemic has distorted many price relationships, the spread in 2021 was negative $1.30, with the Brent-Gasoline spread larger than the Brent-ULSD spread.

But in 2022, the average for the entire year up to the last week is $17.14. And from July 1, it is about $24.90.

Philippe Verleger, a long-time energy economist who produces a readable weekly report, reiterated in his latest edition that it is IMO 2020 that is driving diesel prices relative to the rest of the market.

IMO 2020 is an international regulation that has been in the works for years, requiring fuel oil used to propel ships to have a sulfur content of no more than 0.5%. Several steps have been taken to gradually move to what used to be a much higher limit (or no limit at all). But the International Maritime Organization’s 0.5% rule went into effect at the beginning of the year it’s named after.

One way to produce low-sulfur fuel involves a product known as vacuum gas oil (VGO), which is often used to make finished diesel. But with VGO’s focus on producing lower-sulfur marine fuel, many analysts, including Verleger, expressed concern that diesel prices could jump as a result of the 2020 IMO.

With the pandemic creating a surplus of various petroleum products, this theory has not been tested in 2020. But as economic activity has resumed, it is now starting to exercise, and Verleger points to IMO 2020 as the main reason why diesel is falling to be well above gasoline and crude oil.

“Although the IMO rule came into effect in 2020 as planned, its impact has been delayed until 2022 due to the coronavirus,” Verleger wrote in his latest weekly report. “Voters can go to the polls this November … with $7 diesel.”

He noted that gasoline prices in California, which were at record levels just a few weeks ago, have fallen significantly. Verleger said one reason is the relaxation of some environmental regulations that affect the quality of California gasoline.

“On several occasions, we have proposed to governments to get the IMO to relax its rules and allow more sulfur to be added to marine fuels,” Verleger said. “Our advice was ignored even when it reached people in the Ministry of Finance. The inflexibility … stands in stark contrast to the flexibility seen in California.”

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