Bear market for diesel spells fresh troubles for oil
Prot margins for diesel are slumping as new reneries boost supplies and as mild weather in the northern hemisphere and slow economic activity eat into demand, putting oil prices under further downward pressure.
The lower rening margins for diesel, one of the world’s key industrial and transport fuels, have already prompted some reners in Asia to trim the volume of crude oil they process to reduce their diesel output.
Weaker demand has seen crude oil prices fall sharply in recent weeks and OPEC+ producers meet in early June to decide on the fate of a series of supply cuts agreed since late 2022.
While the group is yet to begin formal discussions, sources told Reuters the group may keep cuts of 2.2 million barrels per day (bpd) beyond June if demand fails to pick up.
Two-month low
Brent crude prices slumped to a two-month low of below $82 a barrel on May 8 on rising inventories and slipping demand. They recovered some losses on Thursday, but are on track to lose over 4% so far this month after four months of gains.
“[OPEC+] would ... need to contend with the mixed performance in rened product markets — gasoline crack spreads have improved steadily, but diesel cracks have markedly deteriorated,” JP Morgan said, adding that it expected the alliance to keep production cuts beyond June.
European diesel prot margins slid to below $16 per barrel in late April, an 11-month low having hit over $40 in February.
The di erence between
U.S. diesel and crude oil, known as a crack spread, eased to a two-year low of $20 in April at the main trading hubs in New York and the Gulf Coast from above $40 a barrel in February,
according to a Commodity Context analysis. Asian diesel margins averaged $17 a barrel in April, down from $22 in the rst quarter.
Analysts say that a mild winter hit diesel demand over the last two quarters, as it meant less buying of heating oil.
Rising output is also weighing on prices. Global rening capacity rose the most since 1977, energy brokerage Stone◣ said, as new projects were launched in Oman, Kuwait and Nigeria.
Reners will add another 2,00,000 bpd of diesel capacity this year, it said.
In Europe, where diesel is used more in cars than elsewhere, the shift to hybrid or electric cars is also eating into demand.
JP Morgan noted road diesel demand in the continent contracted by 50,000 bpd over the past year.
In the U.S., a di erent kind of structural change is underway, with a rising volume of biofuels displacing diesel.
U.S. West Coast demand for petroleum-derived diesel hit its lowest in nearly 28 years in January, while consumption of renewable diesel and biodiesel hit a record high, according to U.S. government data.
Meanwhile slowing factory activity last month in China, the Euro zone and the United States has dragged on diesel demand.
“Now that peak heating season is over, the issue is more related to general industrial slowdown ... and to the car ±eet slowly moving away from diesel,” Natalia Losada, an analyst at consultancy Energy Aspects, said.
European and U.S. diesel futures markets have been trading in contango since around mid-April — where a current contract trades at a discount to a contract for a later date — a sign of oversupply and a signal for traders to store the fuel for better prot later. On May 3, the sixmonth European diesel spread reached nearly $12 a tonne in contango, its widest in a year.
While the diesel market is in contango, the crude market is not. Benchmark Brent crude is in backwardation, the opposite of contango, and therefore still signalling market tightness.