Benchmark diesel slides; what will be impact of red dye change?

The benchmark diesel price has slipped for two weeks straight, as market participants await the effects of a change in federal regulation regarding a specific type of fuel that is now permissible for use by over the road trucks. The average retail weekly diesel price, as reported by the Department of Energy/Energy Information Administration, fell by 18.3 cents per gallon to $6.199 per gallon.

This decrease took effect on Monday but was announced on Tuesday. The decline follows a decline in the ultra low sulfur diesel price on the CME commodity exchange, particularly as reflected by the first month contract. The first month contract for ultra low sulfur diesel (ULSD) saw a settlement of $4.5452 per gallon, which represents a more than 40 cent drop from the previous Wednesday's settlement.

A more accurate comparison is the performance of the November contract, which has been showing a downward trend, though not as significantly as the first month contract. On September 23, the November ULSD settled at $4.6336 per gallon, which then dipped to $4.5452 per gallon on Monday. This downward movement in diesel prices can be attributed to the decision made by the International Energy Agency members to release 100 million barrels of diesel and other products from storage in both Europe and the U.S. These recent declines follow a six-week period in which the price rose several times, with each increase exceeding double digits.

The current price is now 33 cents lower than the all-time high recorded two weeks ago. The impact on retail diesel prices could be significant due to an executive order signed by President Trump, which allows red dye diesel to be used in over the road applications. Red dye diesel is named for the red dye blended into the fuel to designate it as eligible for off-road consumption, such as in agriculture.

The tax exemption for red dye diesel could provide truckers with a tax break on near-record prices. However, states have their own laws regarding dyed diesel, and not all states allow its use on highways. Moreover, most major truck stops do not sell dyed diesel, which could limit its potential impact on retail prices. The actual effect of this federal policy shift on retail prices will become apparent through data from various price services, such as AAA, the weekly DOE/EIA report, and the DTS.USA price in SONAR.

The impact of the excise tax change may be limited and uneven at the pump, as fuel distributors in some states may not carry the tax-free red dyed fuel due to concerns over local laws. Additionally, wholesale distributors may not immediately pass the savings to consumers, and retailers are not obligated to lower prices based on the reduced wholesale costs.