Retail gasoline and diesel prices have declined in recent weeks, and while that’s good news for consumers, diesel’s more rapid descent offers a warning sign when it comes to the economic outlook.
“U.S. manufacturing is in recession, hurting demand for diesel fuel,” said Brian Milne, product manager, editor and analyst at DTN, adding that higher interest rates have also slowed home buying and curtailed construction of new homes.
These “dynamics combine with a diesel market that is seasonally weak and a gasoline market that is seasonally strong,” he said.
Diesel prices have dropped more sharply than gasoline at the pump so far this year, even as supplies of both fuels remain tight.
“It looks like energy is the weapon of choice for betting on a slowdown” in the economy, said Hakan Kaya, senior portfolio manager at Neuberger Berman.
Price moves
On Friday, the average retail price for diesel fuel was $4.052 a gallon, down more than 13% from Dec. 31 and down nearly 14% from a year-to-date peak of $4.689 a gallon on Jan. 5, according to data from GasBuddy. Prices for the fuel are at their lowest since March of last year, after hitting a record high of $5.83 on June 21, 2022.
The average price for a gallon of regular unleaded gasoline was $3.543 a gallon on Friday, up around 11% from the end of last year but down almost 4% from $3.687 a gallon on April 20, the highest price so far this year, GasBuddy data show.
Patrick De Haan, head of petroleum analysis at GasBuddy, blamed diesel’s faster price decline on the economic slowdown, which is hitting diesel more “acutely” than gasoline, and on a milder winter, along with “seasonality,” as the energy market has moved past diesel’s peak winter season.
Demand and supply
Diesel is showing signs of an economy under “duress,” said De Haan.
Weekly U.S. distillate fuel oils supplied, a proxy for demand, was at 3.87 million barrels a day for the week ending April 28, down from 4.24 million barrels a day for the week ending March 31, according to data from the Energy Information Administration. Distillates include diesel fuel.
Gasoline, meanwhile, is headed into summer-driving season, when demand peaks, and has transitioned over to the more expensive summer-grade fuel, De Haan said.
With the potential for a reduction in work-from-home situations, gasoline demand is likely perceived as the stronger product compared with “industry-sensitive” diesel, said Neuberger Berman’s Kaya.
“We do not see any reason for demand destruction” in gasoline, with unemployment persistently low and real wages holding up, he said. A “rebound or even scarcity pricing” for gasoline seems likely if seasonal average driving demand levels hold in the upcoming months.”
The U.S. State Department in March warned that the 2023 summer travel season is expected to be the busiest on record.
That would come at a time when inventories for both gasoline and diesel are already tight.
U.S. motor gasoline supplies were at 222.9 million barrels for the week ending April 28, around 6% below the five-year average, according to the EIA. At 110.3 million barrels for the week ending April 28, domestic distillate fuel inventories stood at about 12% below the five-year average for this time of year.
Neuberger Berman believes the selloff in diesel prices is “somewhat extreme, especially considering that global air traffic volumes are breaking records with fully booked flights to China,” said Kaya. Increased demand for jet fuel will likely support diesel prices, he said.
Outlook
The downside for gasoline and diesel prices is also likely more “contained,” with the Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, “waiting for the short sellers with a big stick,” Kaya said.
In early April, OPEC+ announced a surprise cut in oil production that began in May. That temporarily boosted prices for oil, which can affect prices for oil products.
The biggest factor that affects gas or diesel prices is oil prices, and those have “moderated over the past few weeks,” said Jeff Lenard, vice president of strategic industry initiatives at the National Association of Convenience Stores.
U.S. benchmark West Texas Intermediate crude
CL.1,
CLM23,
traded more than 7% lower for the week in Friday dealings, with prices having lost the gains they scored in the first half of April after the output-cut announcement.
Meanwhile, the lower gas prices could also “spur overall spending, including spending on fuel,” said Lenard, given that consumer sentiment is heavily influenced by the price of gas.
GasBuddy’s De Haan believes diesel prices will fall below $4 a gallon again “for most of the summer,” while gasoline should “remain fairly moderate,” with “greatly diminished odds” for a national average price hitting $4.
The economic slowdown, banking issues and the debt-ceiling fight are “putting bearish pressure on prices” of diesel and gasoline, he said.
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