Growing indications that crude oil flows out of the Persian Gulf are returning closer to pre-war levels are putting renewed downward pressure on oil prices.
That shift is also being reflected in the benchmark retail diesel price used for most fuel surcharges. The latest weekly average from the U.S. Department of Energy/Energy Information Administration came in at $6.382 per gallon, a decline of 14.7 cents per gallon.
The drop marks the first weekly decline in four weeks, bringing an end to a three-week run during which diesel prices reached a new all-time high each week.
The latest price became effective Monday and was published Tuesday.
As The Wall Street Journal reported, Iran’s ability to restrict oil moving through the Strait of Hormuz and use that pressure as leverage in negotiations with the United States is weakening, increasing the possibility that Tehran could turn to military escalation to strengthen its position.
That broader view helped drive oil markets lower Tuesday, alongside a more specific assessment from J.P. Morgan indicating that oil flows out of the Persian Gulf were approaching pre-war levels.
Crude, however, is not the only petroleum product moving through the region. According to reports citing J.P. Morgan, product exports remain only slightly above 50% of their pre-war levels.
Iran is the notable exception to the broader recovery in flows. The U.S. blockade of the country’s ports has effectively brought its exports to a halt, according to multiple reports.
In the futures market, ultra-low sulfur diesel (ULSD) on the CME has also been under pressure. After reaching a recent settlement high of $5.262 per gallon on September 16 the highest settlement since the Iran war began, ULSD fell to $4.6847 per gallon at Friday’s close.
The contract then recovered on Monday and Tuesday, although some of that move appears to have been linked to the expiration of the October ULSD contract on Wednesday.
Short positions that benefited from the decline over the previous seven to eight trading sessions then had to be covered, potentially helping lift the October contract’s settlement during Monday and Tuesday trading.
ULSD gained more than 20 cents per gallon over those two sessions compared with Friday’s settlement, a move that was sharply out of step with other oil markets. Both Brent, the international crude benchmark, and West Texas Intermediate, the U.S. crude benchmark, continued to decline Tuesday.
Another development affecting diesel consumers came from Texas, where Gov. Greg Abbott signed a disaster proclamation allowing dyed diesel to be used on the road beyond its usual agricultural applications.
Although dyed diesel is chemically identical to regular diesel, it carries a lower tax burden and is normally restricted to agricultural use.
Abbott also asked EPA Administrator Lee Zeldin to grant a temporary Clean Air Act waiver from federal ultra-low sulfur diesel requirements.
There is, however, uncertainty over whether such a waiver would significantly change refinery production. Most U.S. refiners have already converted their systems to produce almost exclusively ULSD, with relatively little high-sulfur diesel being made because demand for it in the United States is limited.
As a result, it remains unclear whether refiners would alter their current production strategy even if the requested waiver were approved.
