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Diesel disconnect highlights market angst, not market reality: Bousso

Diesel disconnect highlights market angst, not market reality: Bousso

Demand for diesel fuel is strong in the US and Europe.

Margins are reduced below seasonal levels in spite of tight supply

Market uncertainty over global economic outlook affects diesel prices

Ron Bousso

LONDON 20 March - The Atlantic Basin diesel prices have been increasingly detached from the tightening of supply and demand, reflecting the growing concern about the global economic outlook. When prices don't match the facts, then something must give.

Diesel, a refined fuel that is used in heavy construction, manufacturing and transport, can be a good indicator of industrial activity. This gauge currently points to a bullish future.

First, both in the United States as well as Europe, inventories are still tight. The U.S. Diesel inventories fell sharply to 115,000,000 barrels last week, and are now 6% lower than their five-year and 13% lower than the 10-year averages.

Similarly, diesel stocks independently held in Europe's Amsterdam-Rotterdam-Antwerp (ARA) refining hub have declined by 12% since the start of February. They remain 6% higher than their five-year mean, but are 8.5% lower than their 10-year median.

According to shipping analytics firm Kpler, diesel imports have slowed sharply in Europe so far this season compared with the year 2024.

Supplies have also tightened due to the sharp decline in Russian diesel exports, mainly caused by refinery maintenance and recent Ukrainian attacks on Russian refineries.

Demand is robust, despite a contraction in supply. The EIA reported that the average four-week supply of distillates in the United States reached 4 million barrels of product per day, an indicator for the consumption of heating oil and diesel, last week. This is up 8% compared to last year, and close to its five-year-average.

Eurostat, Eurozone's statistical office, has released preliminary data showing that industrial production in Europe increased by 0.8% from January to the previous month. The demand for diesel will increase even without considering the possible spike in infrastructure and defence investment.

DIESEL DISCONNECT

The supply-demand situation is pointing to higher diesel prices. However, the profits that refiners are making from the conversion of crude oil into Diesel have fallen below seasonal levels.

The benchmark margins for U.S. diesel refinery are around $25 per barrel, as opposed to their five-year average at $32 per barrel. In Europe, the margins for diesel refining in northwest Europe are 22% lower than their five-year average of $16.4 per barrel.

In a global energy market that is complex, it's difficult to pinpoint a single driver for the near-term dynamics of prices. In this case, however, it is likely that the main factor driving the price dynamics in the near-term is the global market uncertainty over the outlook for the economy amid increasing trade tensions.

The erratic, stop-start, rollout by U.S. president Donald Trump of tariffs against major trading partners, including China, Canada and Mexico, in recent weeks, has caused turmoil on many global markets.

Investors are trying to gauge the impact of a possible ceasefire on European energy policy, geopolitical alliances, and sanctions.

The Baker Bloom and Davis Index of Trade Policy Uncertainty, which measures this anxiety in the market, has risen to its highest level since its founding 40 years ago.

Diesel price discrepancy suggests that the negative sentiment, the deep insecurity about the direction of global manufacturing and trade, is overshadowing the tight dynamics of supply-demand on the physical market.

Investors may have gotten ahead of themselves. While the lower diesel price could be an accurate sign if the global economic contraction that was feared materializes, investors might not want to get too excited.

Diesel prices will likely rise if the fundamentals of supply and demand in the market do not change.

(source: Reuters)