John Kingston (John Kingston), who established the benchmark for spot Brent crude oil and has a commodity career of nearly 40 years, recently wrote that the continuous decline in diesel prices may further drag down the overall oil market decline. Below is his opinion.

With the benchmark diesel price falling for the fifth week in a row, diesel consumers should have rejoiced that market trends seemed to have completely put aside concerns about the Middle East conflict.

The average weekly retail diesel price as announced by the US Energy Information Administration (EIA) on Monday local time fell 4.6 cents to $3.848 per gallon. Five consecutive weeks of decline brought the price down a total of 21.3 cents during this period, and the price level hit a new low since the end of January.

Regardless of the impact felt by the oil market from the Israeli-Palestinian conflict, the Arab-Israeli conflict, and the Red Sea crisis, these events clearly had no impact on oil prices. Responses to these developments are often macro-level, and generally affect crude oil more than refined oil products.

The weakness in the oil market continues to be reflected in the refined oil market, particularly diesel. Recently, diesel in particular has received a lot of attention.

A few months ago, the rise in oil prices was mainly due to the tightening of the gasoline market, while the recent overall weakness in oil prices was clearly blamed on the diesel market.

Energy economist Philip Verleger (Philip Verleger) pointed out in his report released last Sunday that due to the increasing role of renewable diesel, the weakness of diesel is becoming more structural. Renewable diesel does not come from petroleum, but is made from raw materials such as vegetable oil and animal fats, including grease collected in restaurant grease blockers.

Flagg pointed out in the report that the US weekly EIA distillate consumption data (about 90% of which is diesel) is 400,000 to 600,000 barrels per day lower than pre-pandemic levels. While some analysts believe this is a result of a weak trucking market, Flugger's report cites the fact that the data doesn't capture renewable diesel consumption.

Flugger wrote, “US EPA taxes and regulations have prompted refineries to convert crude oil processing facilities to renewable diesel production facilities, increasing the supply of renewable fuels. Increased use of renewable diesel will reduce US oil consumption. Currently, the commonly used global oil demand forecasts do not seem to have been adjusted to take into account the impact of this alternative.”

Refiners' earnings conference calls often address renewable diesel and its impact on refiners' profits. For example, during the recent Phillips 66 earnings call, CEO Mark Lashier (Mark Lashier) reviewed the company's expansion of the renewable diesel business and said, “We have gained valuable operational experience and market knowledge to succeed in our ever-expanding renewable fuel business.”

However, in a recent round of conference calls, discussions about the weak diesel market (its cracking price difference with Brent crude fell by about 20 cents/gallon in two months) did occur.

Valero's executive vice president and chief operating officer Gary Simmons (Gary Simmons) opposed the view that demand for diesel is weak. He said on the company's first-quarter earnings call that Valero's diesel sales were about 2% higher than the same period last year.

But he expects diesel demand to be “at the same level or slightly lower than last year.” He further added, “Some freight indices seem to be improving, indicating we may be starting to see better demand.”

Brian Mandell (Brian Mandell), Phillips 66's executive vice president of marketing and commerce, said on the company's conference call that although Ukraine's impact on Russian refining capacity may take about 200,000 barrels/day of Russian diesel supply out of the market, the warm winter in the northeastern United States and the strong return of refineries after the maintenance season have dampened diesel prices.

Compared to crude oil, the weakness in the refined oil market is most evident in the 3-2-1 cracking price difference, which is a basic indicator for measuring refining profits. On Monday, the Brent 3-2-1 cracking spread, based on the CME trading price, fell to close to $21 per barrel. Two months ago, in mid-March, the price was around $29.