Distilling crude oil is once again a colossal business and, specifically, its conversion into gas oil or diesel, the most widely used fuel in trucks, tractors, buses and also in cars in general in countries like Spain. This is bad news for consumers and good news for producers. The price of wholesale diesel contracts in international markets such as ICE or Nymex has once again rebounded strongly this summer, more vigorously, for example, than barrels of oil.
Thus, the margins are skyrocketing in refining. The differential between diesel futures and Brent equivalents in Europe has risen to as much as $50 this week and shows a cumulative climb of 150% from the lows of last May. Traders highlight the record movement for its speed, which did not even occur in 2020 when crude oil went negative. The escalation also occurs in a context of weak demand, with several European economies close to entering recession.
However, the strength of diesel prices is consolidated by low inventories in the industry and the inability of oil companies to increase their refining capacity and supply despite these extraordinary margins in the ratio between crudes and distillates. According to a Bank of America (BofA) report, diesel consumption in developed economies (OECD) experienced a year-on-year drop of 240,000 barrels per day between January and June, and diesel demand in 2022.
“Demand for diesel has also shown signs of weakness, with diesel use in OECD countries declining in the first six months of the year. Measures to reduce the supply of diesel-rich crudes by OPEC+ have exacerbated the situation even more.Francisco Blanch, commodity and derivatives strategist at BofA’s Madrid office These differentials are called ‘cracks’ or margin.
In his analysis, Blanch recalls that the diesel margin with Brent had progressively fallen from the highs of more than 70 dollars per barrel in June 2022 (three months after the outbreak of the invasion of Ukraine by Russia), to less 20 dollars in May 2023 adjusted sales,” he adds.
The diesel rally has calmed down somewhat this week with sharp declines from Monday to Wednesday, but the market experienced moments of tension last Friday when the news of a fire at the Marathon oil refinery in Garyville (Louisiana) Oil sowed nervousness and marked a market peak for fear of shortages. The facility, with a capacity of 596,000 barrels per day. Diesel, gasoline, or cheese are not different parts of crude oil that require different qualities for processing and distillation.
Short-term rising pressure
“We think the future diesel margin curve could continue to rise in the near term as inventories are unlikely to recover substantially during fall maintenance, but we remain bearish on diesel gaps compared to the curve in 2024 due to the expectation of a significant increase in refinery operations and weaker demand,” they add from Bank of America.
The increase in diesel prices is mainly attributed to supply-side factors rather than changes in demand. In this way, tax measures to help consumers of these fuels have little effect or are even counterproductive due to the fact that they tend to raise prices, according to experts.
The penalty in its use in Europe has also caused less investment by oil companies to increase their production capacity. In addition, the supply cuts adopted by OPEC+ in recent months continue to put pressure on the price of the main barrels and their derivatives.
“There are several supply-side factors that could alleviate short-term distillate media shortages, including increased refinery operation, production shifts toward higher OPEC+ producing diesel, a production adjustment to increase average supply /heavy and a greater supply from Iran,” says the US firm. On the demand side, economic activity continues to show signs of a slowdown that will reduce consumption and, therefore, could put downward pressure on diesel prices in the future.
