Despite the economic slowdown in the U.S. and Europe and a failed strong rebound in China, the diesel market globally is tight and set to enter the crop and heating seasons with lower-than-average inventories.
The prices of middle distillates and diesel futures have jumped in recent weeks, outpacing the increase in Brent crude oil prices, which have moved into the $80-85 a barrel bandwidth from the previous range of $75-80.
Portfolio managers and speculators are increasingly betting on higher diesel prices amid seasonally low inventories of middle distillates in the United States and Europe, at a time when stocks typically build ahead of the heating season.
Diesel inventories are not as low as they were at this time last year, but they are still well below historical averages, suggesting that reduced supply due to refinery outages, stronger-than-expected demand, or a colder winter could tip the distillate market further into deficit, stoking up prices and weighing – again – on the movement of goods and inflation.
Lower-Than-Usual Diesel Stocks
Distillate stocks, which include diesel, are lower than normal in the United States.
In the week ending August 11, distillate fuel inventories in the U.S. increased by 300,000 barrels, the Energy Information Administration said in its latest closely-watched weekly petroleum inventory report last week. Distillate fuel stocks are currently around 16% below the five-year average for this time of the year. Distillate demand has been lower than at this time last year, but total U.S. distillate production has also trended lower in recent weeks, EIA data show.
In Europe, diesel-type inventories independently-held at the Amsterdam-Rotterdam-Antwerp (ARA) oil trading hub are also looking quite tight, analysts say.
Globally, middle distillate stocks built last week in all regions apart from ARA, despite steep backwardation discouraging stockbuilding, consultancy FGE said in a note on Friday.
“Although stocks have been moving largely sideways in recent weeks, they are falling increasingly below the historical range for the time of year each week, putting upwards pressure on already high middle distillate cracks,” FGE said.
ING strategists Warren Patterson and Ewa Manthey wrote in a note on Monday,
“The market appears to be concerned about the fact that ARA gasoil inventories are still looking quite tight and we are yet to start seeing a build in inventories as we edge closer towards the start of winter.”
Bullish Bets On Diesel Rise
As a result of lower inventories, hedge funds have been increasingly bullish on distillates this summer. The net long position – the difference between bullish and bearish bets – on ICE gasoil in Europe rose by 5,703 lots to 93,941 lots last week, per exchange data cited by ING. This was the biggest net long position on gasoil futures in Europe since March 2022.
Across the Atlantic, the net long position on ultra-low sulfur diesel delivered in New York Harbor, ULSD NY NYMEX, also hit the highest in 18 months earlier in August.
Analysts expect a tight diesel market ahead in the U.S. and Europe.
“The outlook for Europe diesel/gasoil supply is tight in our current forecast, driven by the lower diesel/gasoil yields expected from lighter crude slates, the shift to jet yields, and unplanned refinery outages,” Emma Howsham, a research analyst for refining and oil product markets at consultancy Wood Mackenzie, told Bloomberg.
“Demand is expected to increase month-on-month to November,” Howsham added.
Refining Margins Jump
Reflecting tighter supply of crude and fuels, refining margins have also strengthened in recent weeks, due to lower distillate yields as OPEC+ and Saudi Arabia are withholding mostly medium sour crude grades from the market, which are ideal for processing into diesel.
Global refinery throughputs are expected to reach a summer peak of 83.9 million barrels per day (bpd) this month, up by 2.4 million bpd since May and 2.6 million bpd higher than a year ago, the International Energy Agency (IEA) said in its monthly report for August.
“The increase in refined product output has failed to ease product market tightness, pushing gasoline and middle distillate cracks to near record-highs,” IEA said.
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Tight gasoline and diesel markets have pushed margins to six-month highs, the agency noted.
“Additional supplies of heavy sour crude would allow refiners to boost activity and help ease product market tensions. But if the bloc’s current targets are maintained, oil inventories could draw by 2.2 mb/d in 3Q23 and 1.2 mb/d in the fourth quarter, with a risk of driving prices still higher.”
One pocket of bearishness in the global diesel market is China, where analysts have recently downgraded their demand outlook on slower-than-expected Chinese economic growth. According to Rystad Energy, demand for diesel in China will grow by 3.81 million bpd in the second half of the year. That’s down from an earlier forecast of growth at 3.9 million bpd.
Yet, strong margins have encouraged a surge in China’s diesel exports, which soared by 153.1% year over year in July, per data cited by Reuters. Year to date to July, China’s diesel exports jumped by 247.1% compared to the January-July period of 2022.
With diesel inventories in OECD economies below five-year averages, a soft landing of the U.S. economy, no major recessions in Europe, and a recovery in China’s underwhelming economic performance could set the stage for another diesel bull run later this year.
By Tsvetana Paraskova for Oilprice.com
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