For many years, companies exposed to diesel prices used Brent as a reference to estimate their costs or structure financial hedges. This practice was based on a strong correlation between both prices. However, that connection is no longer direct. Logistical, geopolitical, and structural factors have reshaped the diesel market, especially for ULSD (Ultra Low Sulfur Diesel). If your company uses this index, it is important to assess whether Brent is still a suitable reference.
Understanding the historical relationship between Brent and diesel
Brent has been one of the main global benchmarks in the oil market, particularly in Europe, Africa, and the Middle East. Due to its quality and availability, many refineries processed Brent to produce middle distillates like diesel. This transformation supported a stable correlation between crude prices and their refined products, making Brent a practical base for hedging refined fuel costs.
What has changed in the diesel market
Since 2020, the diesel market has changed significantly. The pandemic led to refinery shutdowns and demand disruptions. Later, events such as the war in Ukraine reshaped trade flows and supply chains.
Refining capacity in Europe has declined, increasing dependence on imports. At the same time, refining margins, also known as crack spreads, have become more volatile due to natural gas prices, low inventories, and logistical bottlenecks.
These shifts have created a new market environment in which diesel prices respond to more specific and regional conditions, weakening their alignment with Brent.
ULSD and its distinct market
ULSD is the low sulfur diesel used in most heavy duty vehicles and industrial processes. Its price no longer depends solely on crude oil, but rather on multiple factors such as:
- Refining costs, influenced by natural gas prices and operational efficiency
- Weather events or maintenance at key refineries, especially along the United States Gulf Coast
- Inventory levels and regional demand
In the United States, ULSD is traded on exchanges like NYMEX under the NY Harbor ULSD contract, with its own behavior independent of Brent.
Recent data showing the disconnect
Between 2022 and 2024, there have been periods when Brent rose more than 15 percent while ULSD prices remained stable or even declined. This was particularly evident when gasoline margins increased while diesel margins did not, or when distillate inventories built up in certain regions.
Diesel refining margins have also shown considerable variability. In 2022, the crack spread between ULSD and Brent exceeded 60 dollars per barrel at times. In 2024, it has ranged from 25 to 45 dollars, according to data from the EIA and CME Group.
What to consider if you use the ULSD index
If your pricing or hedging structure is based on Brent, but your actual exposure is to ULSD, you may be taking on unnecessary risk. Some recommendations include:
- Evaluating whether the current correlation between your costs and Brent remains valid
- Considering more direct instruments such as ULSD swaps
- Analyzing the volatility of the crack spread between Brent and ULSD, as this difference may better reflect your true exposure
- Identifying any regional influences that directly affect your supply cost
Recommendations for companies exposed to ULSD
Effective hedging means aligning the financial instrument with the physical risk. For companies that purchase diesel or are exposed to ULSD prices, this involves:
- Reviewing supplier pricing structures. Are they truly indexed to Brent or to another benchmark?
- Using ULSD derivatives such as NY Harbor ULSD swaps or futures
- Consulting with specialized advisors to build a hedging strategy that reflects the current disconnect from Brent and the refined product market behavior
Brent remains an important energy market reference, but it no longer fully explains the price behavior of ULSD diesel. For companies that buy, transport, or use this product, now is the time to reassess whether their strategy reflects today’s market conditions. Aligning your hedge with the appropriate instrument can lead to meaningful financial differences.