With the Monday oil market having left traders seeking therapy for severe whiplash, the release of the weekly benchmark diesel price used for most fuel surcharges seemed anticlimatic.
In an ironic twist, the Department of Energy/Energy Information Administration average retail diesel price rose just one-tenth of 1 cent to $3.66 a gallon. That is the smallest incremental move the price can make, barring no change at all.
In the past eight weeks, the DOE/EIA price has risen six weeks and fallen two. The end result is that the latest price is 20.2 cents per gallon more than where it stood Dec. 9, when the latest run of mostly increases began.
The tiny move marks a stark contrast to what was going on in futures markets Monday as they reacted to the prospect of tariffs on imports of oil from Canada and Mexico. However, the behavior of the market clearly showed it was Canadian oil – mostly tied to pipeline deliveries from north to south that are not as easily diverted as Mexican imports could be – on traders’ minds.
When oil markets on the CME commodity exchange opened for business Sunday evening, crude oil, ultra low sulfur diesel (ULSD) and RBOB gasoline, a semifinished product that is a proxy for gasoline in commodity trading, all shot higher. The markets were driven upward by the reality that even a 10% tariff on Canadian crude oil and refined products – less than the 25% tariff on other Canadian imports into the U.S. – could send oil prices higher.
By the end of the day Monday, both Mexico and Canada reached agreements with President Donald Trump to postpone the tariffs on imports from those countries for one month.
The end-of-day result was somewhat disjointed. ULSD for delivery in New York Harbor in March – the first month traded – settled at $2.4631 a gallon, an increase of 6.58 cents from Friday. The strong market topped out Monday at a ULSD price of $2.5048 a gallon before sliding back as the day wore on.
(The Friday settlement for the March ULSD contract was $2.3973 a gallon, but March was the second month traded on Friday. The first month traded was February, which settled that day at $2.4845, after which the contract for that month expired. So a comparison of just front-month settlement Friday to front-month settlement Monday may appear at first to show the market declined rather than rose Monday. A March-to-March comparison is necessary for accuracy. The percentage increase was 2.7%.)
RBOB experienced a similar increase: a March-to-March increase of 2.9%.
Earlier crude gains retreat
But oddly, a big increase is not what happened with crude, even though Canada is a far more significant crude supplier to the U.S. than it is for products.
West Texas Intermediate crude rose just 63 cents/barrel to settle at $73.16/b. Earlier in the day, WTI topped out at $75.18 a barrel.
Brent, the world’s global benchmark, was up 86 cts/b to settle at $75.96/b. Its intraday high was $77.53.
WTI would be expected to be impacted more by a tariff-driven increase in the price of Canadian crude oil. WTI is priced on the basis of delivery into the key point of Cushing, Oklahoma, serving both the U.S. Gulf Coast and the refineries of the U.S. Midwest, where it competes with Canadian crudes.
The role of Canadian crude in the U.S. oil market is significant. In November, U.S. imports of crude from Canada totaled 3.96 million barrels a day out of total crude imports of 6.58 million barrels a day, or about 40% of all U.S. crude imports.
It is also about 24% of all the crude put through U.S. refineries in November, both from domestic and imported sources.
Bank of America Merrill Lynch, in a research note, said the current price of Western Canada Select, Canada’s benchmark, is $58 a barrel, for a 10% tariff of $5.80 per barrel.
It is possible that crude gave back many of its gains because it often trades more in sympathy with financial markets. With equity markets clawing back many of their earlier declines following the news that tariffs on Mexico would be paused for 30 days, crude oil may have gone along for the ride. Refined products like diesel do not trade as closely in tandem with equity markets as crude has been known to do. (The announcement of the delay in tariffs on Canadian imports came late in the day after commodity and equity markets had closed for the day).
No more supply out of OPEC+ for now
The other piece of news in the markets Monday – though not on the level of the potential impact of tariffs – came out of the OPEC+ group. That entity consists of the nations of OPEC plus several key non-OPEC oil-exporting nations informally led by Russia.
After rolling back a decision late last year to begin increasing its output in April, the group met Sunday and decided to hold that April plan in place. Those cuts, on paper at least, total 2.2 million barrels a day.
The final decision on whether to go ahead with the April increases, which one estimate put at 138,000 barrels a day, would be in early March.
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