The 4.1-cent-per-gallon increase in average benchmark diesel retail prices reported Monday could be just the beginning of larger increases in the coming weeks.
The Department of Energy/Energy Information Administration weekly price climbed to $3.602 per gallon. It was the highest price since October and the third consecutive week of gains.
Several factors contributed to the sharp turnaround in oil prices after weeks of sharp declines.
On Monday, ultra-low sulfur diesel settled at $2.5333 per gallon on the CME Commodities Exchange, the highest level since July 7, when it settled at $2.5236 per gallon. Since hitting a recent low of $2.058 per gallon on September 10, ULSD prices have risen 46.56 cents as of Monday's settlement.
But even more striking is the recent price action. ULSD closed at $2.3507 per gallon on Thursday, meaning the price increased by 18.26 cents in just three trading days. Most of those gains came after new sanctions were imposed on Russian oil shipments on Friday and Monday.
The latest bullish stimulus has been the decision by the Biden administration and the UK to impose sanctions on Russian oil shipments on top of already existing sanctions, although the impact of the first batch of sanctions is widely believed to have faded over time.
Bloomberg cited a report from Morgan Stanley saying the new sanctions regime "exceeded expectations."
"It will take some time to digest these measures, but this will create downside risks to oil supply, at least for some time," the Morgan Stanley report said.
The sanctions hit major Russian oil producers Gazprom Neft and Surgutneftegas, as well as numerous shipping, oil service equipment companies and insurance companies, according to a report by S&P Global Commodities Insights company and other goals.
A report by S&P Global Commodity Insights quoted its analyst, Rahul Kapoor, head of shipping analysis and research, as saying, “With so many ships and traders, charterers and Marine insurance companies are subject to sanctions and this series of sanctions is likely to weaken the near-term flow of Russian oil into Asia, especially India and China.”
These sanctions and the prospect of some restrictions on Russian oil exports are seen as the main driving force for two consecutive days of sharp rises in oil prices in the futures market.
The overall increase in oil prices did not reflect the situation for diesel, which has risen more than crude oil.
Winter also plays a role in rising prices, with diesel prices rising faster than crude oil prices. Diesel is a distillate, just like heating oil, and cold weather is always a factor in the strength of diesel in the winter.
A comparison of front-month spreads for ultra-low sulfur crude and Brent, the global crude benchmark, shows the spread has widened significantly in recent weeks, coinciding with the world's coldest winter in several years.
On December 5, the spread was less than 44 cents per gallon, with CME's ULSD well above Brent. The spread was close to 46 cents on December 26. In the last two trading days, the price difference exceeded 60 cents per gallon.
The impact of the cold can be seen in a report from Bloomberg last week. The report noted that global LNG prices have risen above oil prices on an energy equivalent basis, calling the situation "rare." Bloomberg said the premium was "significant" and "paved the way for major consumers to switch to cheaper but dirtier fuels."
These dirtier fuels may be fuel oil, which is the heaviest and dirtiest product of the refining process. But in some applications, when users switch from natural gas to oil, they also use heating oil or diesel.
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