Tight diesel market dominates the spotlight Tight diesel market dominates the spotlight Tight diesel market dominates the spotlight

Tight diesel market dominates the spotlight

Ole Hansen

Head of Commodity Strategy

Summary:  Crude oil trades higher for a third day supported by a general improvement in risk appetite and the market worrying about the ability and price of fuel products over the coming months. OPEC+ production cuts reducing the availability of higher distillate yielding crude oil, the EU embargo on Russian oil together with a global refinery capacity struggling to meet robust demand, have all helped drive refinery margins and prompt spreads sharply higher, an indication that we could be facing high winter prices for diesel and heating oil.


Crude oil trades higher for a third day supported by a general improvement in risk appetite as the dollar and US yields trade trade softer on increased speculation that the FOMC, following another 75 basis rate hike next week, may slow it’s aggressive rate hike pace in order to ascertain the economic impact of the actions already taken. In addition, the market continues to worry about the availability and price of fuel products over the coming months when OPEC+ cuts production and the EU embargo on Russian crude and fuel imports start.

While crude oil has been mostly rangebound since July, the fuel product market has continued to tighten as supplies in Europe and the US has become increasingly scarce, thereby driving up refinery margins for gasoline and especially distillate products such as diesel, heating oil and jet fuel. Some relief has been provided by China which recently issued its biggest fuel-export quota this year in order to help revive its economy hit by Covid lockdowns and a property slump. The move not only highlighting the slowdown in demand in China but also how incredible profitable refining activity has become. So far, however, the product futures markets in Europe and the US are not showing any signs of relief from additional barrels flowing from China with Asian consumers potentially benefitting the most.

The focus in terms of tightness remains the northern hemisphere product market where low stocks of diesel and heating oil continues to raise concerns. The market has been uprooted by the war in Ukraine and sanctions against Russia, a major supplier of refined products, especially to Europe. In addition, the high cost for gas has supported increased switching activity from gas to other fuels, especially diesel and heating oil. This tight market situation was recently made worse by the OPEC+ decision to cut production from next month. While the continued release of US (light sweet) crude from its strategic reserves will support production of gasoline, the OPEC+ production cuts will primarily be provided by Saudi Arabia, Kuwait and the UAE, all producers of the medium/heavy crude which yields the highest amount of distillate. 

The current tightness is being reflected through rising refinery crack spreads and sharply higher prompt spreads, the latter signalling the situation is likely to get worse during the northern hemisphere winter. An example being the Nymex ULSD (Heating Oil) contract where the current front month of November trades at an elevated $410 per barrel, but some $45, or 11% below the next month of December. 

As long the product market remains this tight the potential for lower crude oil prices seems low. Several refineries, especially in the US are currently undergoing maintenance which has further depleted stocks at a time where exports are running at a record pace. Yesterday the EIA said US exports of oil jumped to a new weekly high above 5.1 million barrels a day and it helped drive overall shipments of oil and fuel products to a fresh peak at 11.4 million barrels per day. Developments that is taking place while the US government continues to pump crude oil into the market from its Strategic Reserves, an increasingly flawed and politically motivated strategy ahead of next month’s mid-term elections, not only because it reduces the ability to respond to another crisis in the future, and more important from a short-term perspective, it is failing to curb prices of gasoline and diesel to the American consumer. 

Source: Saxo Group
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.