A pick-up in freight activity around the world is tightening fuel markers and could cause a shortage of diesel that was barely avoided last year due to the slump in industry activity.
Moody’s predicted this week that the price of diesel in the United States alone would add more than $1 from pre-pandemic levels this year, hitting $4.50 per gallon. In Europe, fuel imports from India jumped threefold in February, indicating stronger demand. Yet supply has become tricky.
In the U.S., distillate inventories remain below the five-year average despite several weekly builds of quite sizable proportions earlier this year. In Europe, refining capacity is stretched so Europeans are relying on imports. Yet, with a clampdown on Russian crude going to India, imports could become costlier as well.
Reuters’ John Kemp wrote in a column this week that trade flows were beginning to improve after last year’s stumbles despite still high interest rates, and this was pushing diesel demand higher.
Citing data from the Netherlands’ Bureau of Economic Policy Analysis, a research entity, Kemp said that world trade volume rose to the highest in 10 months in January on a seasonally adjusted basis. He also cited information from Heathrow Airport in London, which reported that it had experienced its busiest start of the year for freight since before the pandemic. Related: Mexico’s Oil Giant Delays Platform Repairs Despite Methane Leaks
Data from trading hubs such as Singapore, Japan, and South Korea, as well as port data from the U.S. also appear to point towards strengthening trade across the world.
These signs of a pick-up in activity suggest that more of the same news may be on the way, leading to higher diesel demand—which is already pretty strong. The mass rerouting of ships away from the Red Sea and around Africa has led to higher bunkering demand, and bunkering is very often diesel, for now.
A year ago, oil traders were making bets on a diesel shortage. They had a good reason for it. During the pandemic lockdowns, trade surged, and so did demand for diesel. But, production did not surge, resulting in an imbalanced market that barely avoided a shortage. The price for this avoidance was a slump in economic activity because of high interest rates.
Now, however, it appears that economic activity is beginning to recover, possibly helped by the prospect of rate cuts, notably in the United States. This means higher fuel demand. And refining capacity remains limited after a slew of shutdowns during the lockdowns. All this points to higher prices.
Higher fuel prices are never good news in the context of still fragile economic growth in key markets. Higher fuel prices put a natural cap on consumption at some point as freighters pass their higher costs on to customers. As with the rest of the oil market, prices act as a natural regulator of supply and demand.
Yet, as mentioned above, central banks plan to cut rates this year. The Fed plans as many as three cuts. And this, as Reuters’ Kemp points out, will only strengthen industrial activity and lead to even higher demand for diesel, which, besides transport, is also used in manufacturing and construction.
A shortage, then, begins to look increasingly likely, as do higher crude oil prices as refiners boost their middle distillate rates. But it would depend on the size of the rate cuts. Kemp sees those at moderate levels to discourage a surge in consumption that would almost certainly bring about a fuel shortage. Perhaps banks will be careful. Perhaps they would even delay their rate cuts as a way of managing the situation.
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However, if activity is already picking up in spite of the still high-interest rates, this means the market is healing on its own and central banks cannot rein in demand for fuels through their monetary policy decisions. The one thing that can do that is the market itself.
By Irina Slav for Oilprice.com
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