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The fifth consecutive decline in the benchmark diesel price used for most fuel surcharges is likely the end of the road for this particular downward cycle.

The Department of Energy/Energy Information Administration average weekly retail diesel price dropped 2.1 cents a gallon to $3.476 effective Monday, announced on Tuesday. The five-week decline from $3.639 a gallon on April 7 marks a drop of 16.3 cents a gallon during that time.

But for the declines to continue, they would need to fight back against the headwinds of ultra low sulfur diesel (ULSD) prices on the CME commodity exchange, which have turned sharply higher in just the past five trading days.

ULSD settled Wednesday at $1.9766 a gallon, the third time in the prior four trading days it had settled at less than $2. But since then, it has climbed sharply, settling Monday at $2.1111. At approximately 11:30 a.m. EDT Tuesday, ULSD was up another 3.3 cents, an increase of 1.56%, to $2.1441 a gallon. That number, if it was Tuesday’s settlement, would have been the highest since April 24.

Much of the increase came Monday, when ULSD rose 4.47 cents, or 2.16%, to the $2.1111 mark, driven in part by the rise in virtually all financial assets following the China-U.S. agreement on lowering tariffs.

Even in the face of increasing OPEC+ production into a market that has been seen as weak, prices in key crude benchmarks have risen in recent days. Brent, the world crude benchmark, rose to settle at $64.96 a barrel Monday, up from $60.23 on May 5.

One reason cited for the upward market pressure is the data showing worldwide inventories are tightening.

For example, the weekly EIA inventory report released last week, with data through May 2, showed ULSD inventories in the U.S. at 97.3 million barrels. The average of ULSD inventories for the first week of May from 2018 to 2024 was 113.9 million barrels, though that figure would have been impacted to some degree by the turmoil of COVID.

Potentially more revealing is the spread between the first and second month’s ULSD contract on CME.

When a market is dealing with tight inventories, it will be structured in a situation known as backwardation, with the front month more expensive than the second month, the second month more expensive than the next month and so on. In a perfectly balanced market, the exchange prices should rise month to month, reflecting the time value of money and the cost of storage.

When inventories are tight, the most valuable market is the current month. And the backwardation is reflecting that in the ULSD market.

But meanwhile, possibly reacting to the latest news of an increase in OPEC+ production, the backwardation in Brent settled Tuesday at 57 cents/barrel. On April 22, it was $2.95/b, suggesting that while products like ULSD might be dealing with tightening inventories, the situation in crude might not be as much of a squeeze.

The spread between first month and second month ULSD had tightened to 1.42 cents per gallon by May 6, with front month June barrels worth that much more than those for July barrels. But since then, the spread has widened to a settlement Monday of 3.32 cents.

That is still not as wide as where the spread was a few weeks ago. It hit 7.69 cents on April 28. But the sum total of the backwardation shows a market whose structure is reflecting tight inventories.

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