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

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.