The benchmark price used for most fuel surcharges fell this week by the smallest increment possible, with the broader market showing signs that a recent slide is beginning to be overtaken by tightening market fundamentals.

The Department of Energy/Energy Information Administration average weekly retail diesel price declined 0.1 cents/gallon to $5.639/g, effective Monday and published Tuesday. The decline comes after a sharp increase of 28.9 cts/g last week, which followed three weeks of declines.

The small downward move comes amidst what is growing to be a schism in oil market views about where they might be headed.

The relative calm in recent weeks has led to some confidence that oil markets have taken a big loss in supply in stride and managed to rise sharply but not move into areas seen only at two other times in history: the 2008 price surge and the 2023 reaction to Russia’s invasion of Ukraine.

The other side can be summed up by what energy economist Philip Verleger said in his most recent weekly report, “Based on historical data, crude should now trade for around $200 per barrel.”

It’s not trading at that level, nowhere near it. But in the past two days, the futures price of world crude benchmark Brent has started to move upward in a reversal of a mostly downward trend that saw Brent settle at a recent high of more than $118 on April 29 before falling to a settlement of just over $100/b Thursday.

Recent upward moves

The futures price of Brent, the world’s crude benchmark, settled Monday at $104.21. That was a 2.88% gain from Friday but remains well below a recent high settlement of $114.44 on May 4.

But the increase Monday was followed Tuesday by further gains. At approximately 9:10 a.m. EDT Tuesday, Brent on the CME commodity exchange was trading at $107.41/barrel, a gain of $3.20/b, 3.07%, from Monday’s settlement.

Meanwhile, ultra low sulfur diesel (ULSD) on CME at that time was up 9.43 cts/g from Monday, 2.38%, to $4.0692/g.

The worldwide squeeze on inventories that is beginning to become a focus of oil markets–a factor in Verleger’s statement– is highly visible in recent weekly statistics from the Energy Information Administration (EIA).

Nationwide stocks in the U.S. of ULSD for the week ended May 1, reported Wednesday, were at 93.14 million barrels. Since the Iran war began in March, those stocks have declined by 14.8 million barrels, a drop of about 13.4%.

More striking is the fact that the report shows ULSD stocks at their lowest level for the first week of May in the last 10 years. Two of those years, 2020 and 2021, have inflated numbers due to the pandemic. But the latest weekly EIA report shows those ULSD inventories below every other year in that 10-year stretch.

The tightening of the diesel market relative to crude can be seen in the spread on the CME between Brent and ULSD.

A straight comparison of the front month prices between the two show that ULSD has started to move back toward a $1.50/b premium over Brent. That spread since the war began has been over $1.80/g, but in the last two weeks has fallen as low as $1.23. But Monday’s settlement put it at just under $1.49/g.

Brent’s high water settlement since the war began ULSD was a settlement of $118.35/g on March 31. It has been below $100/b at several points, and its failure to move higher even with little immediate prospect for the end of the Strait of Hormuz closure has left some observers scratching their heads.

What’s keeping prices restrained

Verleger cited several reasons for the continued restraint in oil prices.

“The key disparities this time are the substantial amount of Russian and Iranian stocks stored at sea and the extremely high price sensitivity of consumers, especially in China,” he wrote. “The availability of ocean-borne stocks and decreasing demand (sometimes called “demand destruction”) have moderated the war’s impact. This moderation will be temporary, however, if the global economy responds as it did to past disruptions.”

A recent article in Bloomberg referred to two other factors that have helped keep a lid on prices and said “traders (are) now questioning how much longer they can be sustained.”

One was the high level of U.S. exports of crude and products, driven in part by releases from the U.S. Strategic Petroleum Reserve. In recent weeks, U.S. exports of crude and products topped 12-million b/d three times and more than 14 million b/d once. Prior to that, total exports had only exceeded 12-million b/d twice.

Bloomberg reported that the other factor was “a sudden collapse in Chinese crude purchases.”

“Some of (China’s) large oil companies have been reselling cargoes from West Africa in recent weeks,” Bloomberg reported. “The move came shortly after state refiners were given permission to draw from commercial storage, helping to ease supply pressures.”

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