EIA: Spring diesel prices not following fundamentals

By Nicholas Zeman | May 11, 2009
Posted May 13, 2009

Despite the highest inventories of crude oil since before the Great Depression, around 375 million barrels, prices are rising to the puzzlement of the U.S. Energy Information Administration. "Prices are at $50 or $60 per barrel, when they should be at around $35 per barrel according to the fundamentals of supply and demand," an EIA source told Biodiesel Magazine.

Diesel market trends are following crude oil's suit. "The trucking industry, which buys more diesel than any other sector, has lost 30 percent of its business in a single year, and the major areas of diesel demand are also performing poorly," the EIA said. "We're done with the home heating oil season. Rail freight's biggest customer is the auto manufacturers, so their volume is down. Next is construction…and none of the people I know in construction are working…so all of the major customers of diesel are not buying nearly as much fuel – yet the price is going up."

The crude spot price from May 5 to May 12 jumped from $53.81 to $58.81, at Cushing, Okla., a major pipeline distribution spot.

OPEC has cut back on the amount of oil they are supplying to the market in addition to curtailing production, said Phil Weiss, an analyst for Argus Research Group in New York City. "If they didn't cut production, inventories would be growing even more."

A production cut in crude obviously has an effect on prices, even if surpluses remain high. There are other market conditions, however, which are also firming up price performance. "One reason for the rising price of crude and diesel is that the market is making bets on how quickly the economic recovery will take place," Weiss said. 'We've seen some early positive signs."

According to EIA's weekly regional price report, the national average price of diesel fuel rose, gaining 3 cents to $2.22 per gallon for the first time in four weeks. The price, while higher than a month ago, was an astounding $2.12 below last year's average price, and $2.55 less than the all-time high price recorded on July 14, 2008. Prices in all regions of the country increased with the East Coast, moving three cents higher to $2.26 per gallon. The Midwest price also went up three cents, to $2.16 per gallon.

"The average price for the Gulf Coast increased the most of any region, growing four and a half cents to $2.20 per gallon," EIA reported. "The increase in the Rocky Mountains was the smallest of any region, creeping up nearly a penny to $2.27 per gallon. The West Coast moved up more than two cents to $2.33, while the price in California rose two cents to $2.34 per gallon."

"This is ridiculous and we don't know why it's happening," said Biodiesel Magazine's source at the EIA. "The market is not following the fundamentals."

As reported by World Energy Alternatives, the good news for the biodiesel industry was that rack prices for the renewable fuel were also up 5 cents per gallon for the week of May 11.
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