Diesel prices are climbing as temperatures drop, and further hikes in the DOE/EIA benchmark are expected

Diesel Prices Surge Amid Cold Weather and Refinery Disruptions

After providing relief to consumers late last year, the oil market has shifted, now presenting significant challenges as ultra-low sulfur diesel (ULSD) futures reached their second-highest level in nearly two years on Tuesday.

Even before the most recent spike, the upward trend in diesel futures was already evident in the Department of Energy/Energy Information Administration’s weekly average retail diesel price. This benchmark, which influences most fuel surcharges, climbed for the second week in a row—rising by 9.4 cents per gallon to $3.624. Combined with the previous week’s 7.1 cent increase, diesel prices have rebounded by 16.5 cents per gallon after an eight-week decline.

Despite these gains, current diesel prices remain below the November 17 peak of $3.868 per gallon, which was followed by a two-month downward trend.

However, with ULSD prices on the CME commodity exchange continuing to rise, another increase in the benchmark price is highly likely next week.

Factors Driving the Diesel Rally

Several elements are fueling the surge in diesel prices. The recent cold snap, coupled with the close relationship between ULSD and heating oil—differences narrowed by environmental regulations—has pushed ULSD prices to their highest levels in over two and a half years.

On Monday, ULSD settled at $2.6462 per gallon, up 7.82 cents from the previous session. Over the last three trading days, the price has jumped by 27.94 cents, having closed at $2.3668 on Thursday.

Tuesday’s settlement marked the second-highest price since April 2024, just behind the $2.7011 per gallon recorded on November 18. On April 16, 2024, ULSD settled at $2.6513 per gallon.

The recent cold weather has caused diesel prices to climb much faster than crude oil. For instance, the price gap between Brent crude and ULSD, measured in cents per gallon, widened to $1.04 on Tuesday—up from 86 cents on Friday and 67 cents at the start of the year.

According to Bloomberg, U.S. diesel prices have surged to a premium over similar European products, with the gap reaching about 40 cents per gallon—the largest in roughly three years.

Weather-Related Challenges Impacting Supply

Three distinct weather-driven trends are contributing to the diesel price rally:

• Cold temperatures have disrupted operations at multiple U.S. refineries. Patrick De Haan, VP of Petroleum Analysis & Media Relations at GasBuddy, reported on his X feed that more than six refineries are experiencing operational issues, many due to the frigid weather.
• Bloomberg highlighted that refineries along the Gulf Coast—operated by INEOS, Pemex, Shell, and LyondellBasell—have reported gas flaring, a sign of operational difficulties. Additionally, ExxonMobil’s Baytown facility, one of the nation’s largest, reduced output on Saturday in anticipation of the cold, while Phillips 66’s Wood River refinery in Illinois also faced challenges.
• Expectations of increased demand for heating oil are influencing the market. While diesel demand may not rise, the need for heating oil is expected to grow, prompting refineries to allocate more distillate production toward heating oil rather than diesel.

Global Market Dynamics and Production Cuts

The significant price difference between U.S. and European diesel could soon encourage more imports from Europe to the U.S., while discouraging U.S. exports. Typically, the U.S. exports about 1.1 million barrels of ULSD daily to international markets.

Additionally, there have been numerous reports of reduced oil output in the Permian Basin of West Texas, with estimates suggesting cuts as high as 1.5 million barrels per day. These reductions may soon be reflected in the weekly EIA supply and demand reports released on Wednesdays.