With the first full week of the second Trump administration in the books, the weekly average retail diesel price reacted sharply to an overall decrease in oil prices by declining for the first time in five weeks.
The average weekly retail diesel price published by the Department of Energy/Energy Information Administration fell 5.6 cents/gallon to $3.659. It follows an increase a week earlier of 11.3 cts/g.
In a repeat of what was a feature of his first term, the first week of the second Trump administration did feature a presidential call for OPEC to lower oil prices.
During the first Trump term, his occasional call to producers that came with veiled threats were often powerful in dropping prices. One analyst dubbed the sensation the “Trump put,” a reference to a put option. Put options enable the holder to sell oil at an earlier agreed-upon price that can be profitable when exercised, if it was set at a higher than the prevailing market price when the option is exercised and the sale is made. A Trump statement demanding OPEC take action to lower prices was often self-fulfilling, enhancing the profitability of some put options.
At his speech in Davos Thursday at the World Economic Forum, news agencies reported that Trump said he was “surprised” OPEC had not reduced its prices. However, OPEC and the wider OPEC+ group that includes several non-OPEC exporters nominally led by Russia does establish production quotas, but it does not set prices.
Those production levels were set to rise in January, but the continued sluggish market in place in early December led to that increase being put off until April. OPEC+ had put off increasing production several times before that as well.
That decision by OPEC+ to delay increases until April was made December 5, when the settlement price for Brent, the world’s crude benchmark, was $72.09/barrel.
Brent got as high as a settlement of $82.03/b on January 15. The earlier upward push in prices in January has been attributed to additional sanctions placed on Russian shipping in the waning days of the Biden administration.
Even during Trump’s first term, there were indications that markets had taken those statements of wanting lower prices less seriously with each passing instance of his demands.
Trump’s statements last week demanding lower prices did come alongside a falling market. Brent settled Wednesday at $79/b. It closed a day later, the day Trump made the comments, at $78.29/b. Brent rose to a settlement Friday of $78.50/b. The settlement Monday was $77.08/b, with oil declining in tandem with the sharp fall in equities markets. There was little chatter in the market that it was reacting to Trump’s call for lower prices.’
Bloomberg reported Monday that OPEC+ will meet next week. Despite the fact prices have risen since the start of the year, and the call by President Trump to take action, no acceleration is expected in the group’s plan to begin ramping up output in April.
Separately, in a report published Sunday on Bloomberg, the bullish impact of the Biden sanctions on Russia, which gave a significant boost to the market just two weeks ago, was called into question.
According to Bloomberg, Goldman Sachs has published a report that said those sanctions “are unlikely to result in a large hit to production.” Tanker fees are strong enough to incentivize ships that were not part of the Biden sanctions to move Russian crude and take the risk of being added to any further sanctions. The report also said ESPO, which is Russia’s crude grade shipped out of its Pacific Coast ports, has fallen enough in value relative to other crudes that it is incentivizing buyers to scoop it up.
In the diesel futures market, a more worrisome trend from a buyer’s perspective is the widening of the spread between the first month ultra low sulfur diesel (ULSD) price on the CME commodity exchange and the second month.
When the first month price is higher than the second month price, it is a structure known as backwardation. Markets that are wrestling with tight inventories move into backwardation, as the most valuable barrel is the one for immediate delivery.
The opposite is called contango. A market in perfect balance is in contango, as the rising spread reflects the cost of storage and the time value of money.
After many months of contango in ULSD, the market moved into backwardation in late December. But that backwardation spread in recent days has been widening, settling at almost 7.5 cts/g on Tuesday, with the front month that much higher than the second month. On Friday, that spread was a little less than 7 cts.
The overall movement in the spread this month suggests tightening inventories, though data for the U.S. published by the Energy Information Administration is showing the opposite. But a commodity market inevitably reflects global conditions. The transparent data released by the EIA each Wednesday does not have an international counterpart. The month-to-month spread in the ULSD market at times does not align with what the data is showing for U.S. inventories, as the market is impacted by international conditions as well as those in the U.S.
One piece of bearish news that has emerged in the past few days is that Kazakhstan, which is a significant non-OPEC exporter but is a member of the OPEC+ alliance, increased its production by opening an expansion of its largest field, Tengiz which is operated by Chevron. The output is said to be a record and comes as Kazakhstan has been identified as one of the non-OPEC countries that is falling short of its pledged reductions in output. It is that sort of production in excess of a quota that could have an impact on any OPEC+ decision to not begin increasing production in April as planned.
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