Low global diesel supplies support crude prices despite OPEC+ boost

Reuters

4 days ago

NEW YORK, Aug 7 (Reuters) - Low diesel stockpiles worldwide are countering the downward pressure on crude oil prices from rising OPEC+ supply and setting the stage for a third consecutive year of above-normal refining profits.
Diesel, the top component of global fuel demand, has been the lone bright spot in an otherwise lackluster oil market this year as refinery closures and a shortage of crude with higher diesel yields have kept inventories below historical norms, analysts said.
Meanwhile, demand for the industrial and transportation fuel has been unexpectedly strong because of resilient manufacturing activity and cooling demand due to heatwaves in parts of the world.
Tight stocks of diesel have also helped support global oil prices, allowing the Organization of the Petroleum Exporting Countries and its allies to unwind their largest tranche of output cuts months ahead of target, and could justify further supply hikes under discussion.
Global benchmark Brent crude futures have rebounded 15% to around $68 a barrel from this year's lows, hit in May when OPEC+ first began unwinding supply cuts.
"Tight diesel inventories are providing a very strong floor to oil markets in the mid-$60 per barrel range in the short term," Natasha Kaneva, head of global commodities strategy for J.P. Morgan, told Reuters.
U.S. distillate fuel inventories stood at 113 million barrels by August 1, 12% below the five-year average, according to government data.
At Europe's Amsterdam, Rotterdam, Antwerp trading hub, independently-held diesel stockpiles slipped under 13 million barrels for the first time since December 2023.
The tight market has been something of a surprise after analysts and fuel producers earlier this year anticipated that the opening of new refineries around the world would cause a supply glut.
In the latest quarters, however, top global refiners have reported stronger-than-expected profits due to resilient margins.
"If I were a trader, I would be very comfortable going long diesel in the months ahead," said Tom Kloza, an analyst for consultancy firm Turner, Mason & Co.
Tight stockpiles have pushed diesel refining margins higher in recent months.
In the U.S., ultra-low sulfur diesel (ULSD) futures briefly traded at a $40 premium over U.S. crude futures
on July 18, the highest since February 2024. The premium is now at about $31, versus the prior five-year average of $30.
In Europe, diesel margins stood at $21.13 as of August 5 over Brent futures, after hitting a near one-year high of $26.31 at the end of June.
Heavy maintenance activity at existing plants has also weighed on diesel supply, said Energy Aspects analyst Natalia Losada.
Looking ahead, however, even more refinery closures are expected in the U.S., especially in California and Europe, and the addition of the big 650,000 bpd Dangote refinery in Nigeria has not been able to offset the reduced capacity.
Lower Mexican exports and tightening U.S. sanctions on Venezuela and Russia are also set to restrict availability of medium- and heavy-sour crudes, which have a higher diesel yield, energy economist Philip Verleger said in a note.
The U.S. is also pressuring China and India to stop buying oil from Moscow.
Agreements underway to resolve U.S. trade disputes could exacerbate the diesel shortage by pushing Asian importers to buy more U.S. crude oil, which has a lower diesel yield, Verleger said.
"The Trump administration's trade policies and sanctions will be a major contributor to the tightening market," he said.
Still, before the disputes are resolved, U.S. tariffs against its trading partners could slow the global economy, hitting diesel demand, investors said.
In Asia, margins have already fallen to nearly a two-month low of $17 a barrel due to softening near-term supply-demand fundamentals, giving back most of the gains recorded since the Iran-Israel conflict escalated in mid-June.