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Dip in diesel may be short-lived

April 24, 2012

A continued and welcome decline in the U.S. average price for diesel fuel of nearly 5 cents per gallon this week may be only temporary as domestic demand for the petroleum distillate continues to grow.  

Meanwhile, gasoline prices also retreated significantly with a more than 5 cent per gallon average drop for the U.S. as a much smoother-than-expected transition from winter to summer blends resulted in far less refinery downtime and higher fuel inventories, noted the Oil Price information Service (OPIS).

According to the Energy Information Administration (EIA), the U.S. average price for diesel fell to $4.085 per gallon this week from $4.127 per gallon during the week of April 16 and is now actually just over 1 cent per gallon cheaper compared to the same week in 2011.

Diesel prices dropped the most in the West Coast region minus California – a nearly 6 cent drop to $4.229 per gallon – followed by the Midwest (a 4.7 cent per gallon decline), the Gulf Coast (a 4.5 cent drop), and the Lower Atlantic (a 4.1 cent decrease), noted EIA.

The cheapest diesel is now in the Midwest ($3.974 per gallon) followed by the Gulf Coast ($3.993) and the Lower Atlantic region ($4.05 per gallon).

Yet this decline may be short-lived as demand for distillate in the U.S. – the base petroleum stock from which diesel fuel is made – continues to increase, Denton Cinquegrana, OPIS’s editor-West Coast spots, told Fleet Owner.

“Distillate demand is now up to around 4 million barrels [of oil] per day right now; that’s a decent snap-back in demand from where we were last year and means the U.S. economy may be doing a little better than everyone thinks,” he said. “So right now we might be at a price ‘plateau’ for a while.”

One of the other factors in play that will affect the cost of diesel is the narrowing of the “spread” between two critical petroleum pricing metrics – West Texas Intermediate (WTI), which represents the price for mostly U.S. domestic oil, and the London-based Brent crude index that covers North Sea and Middle East oil.

“That spread got close to $30 last year and is now about $14,” Cinquegrana said. “That means for example that if refineries on U.S. coasts are paying $120 for a barrel of oil, those in the Midwest buying WTI oil would pay closer to $106 – leading to wide diesel and gasoline price differentials by region in the U.S.”

Now, however, that WTI-Brent spread is predicted to shrink to around $4 by year’s end, meaning fuel prices should become more consistent on region-to-region in the U.S. Yet while that will stabilize prices, they may also stabilize at higher levels, too, he stressed. 

About the Author

Sean Kilcarr

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