Diesel, The Mid Distillate
The world’s key industrial fuel is flashing warning signs for global oil demand.
If you’re already subscribed and/or appreciate the free summary, hitting the LIKE button is one of the best ways to support my ongoing research.
Diesel margins have halved over the past three months and diesel prompt calendar spreads are in their deepest contango since mid-2020.
While diesel demand is not as outright bad as weekly EIA data might suggest, beleaguered demand has, very likely, been the driver of this recent diesel weakness and has certainly failed to keep up with resurgent supply.
Meanwhile, diesel exports have shifted from steep contraction as of late-2023 to fresh growth on the start-up of new diesel production capacity; moreover, Russian diesel supply losses from Ukrainian drone strikes have failed to support the market and will, most likely, return to further weigh on balances.
Surplus supply has driven a rapid and largely counter-seasonal rise in inventories across key storage hubs, with stocks in ARA Europe and Singapore now above normal seasonal averages; a negative shift in speculative market positioning is further depressing the situation.
For those concerned about the current state of global oil demand, the diesel market is flashing critical warning signs. Diesel margins have plummeted over the past three months from more than $40/bbl to less than $20/bbl. Even more concerning, diesel prompt calendar spreads are in their deepest contango since mid-2020—you know, when the entire world’s transportation sector was frozen by pandemic lockdowns.
Clearly, something has gone awry in the market for middle distillate fuels like diesel, gasoil, and jet fuel. So, what’s going on and what does it mean for the broader oil market? Plunging crack spreads and weak term structure are supported by rising inventories in key storage hubs, which, in turn, have risen on the back of rebounding supply and beleaguered demand and all further depressed by a negative shift in speculative market positioning.
Let’s dig in.