By SRH
The “Perfect Storm” Diesel Crash Has Wall Street Worried:
Global Diesel Exports Crash, According to Goldman’s Daan Struyven
Investors Warn of “Diesel’s Perfect Summer Storm” as Analysts Anthony Yuen of Citi and Francisco Blanch of BofA Predict Global Diesel Inventories “Below 5YR Minimum”
Warns of Hormuz Shock from Jefferies’ Sam Burwell: “Manifesting Itself In Cracks, Not Crude”
More than five months into the conflict, daily geopolitical developments in the Gulf region continue to impact Brent crude. The latest US-Iran wrap explains that the Strait of Hormuz is seeing muted traffic, which is limiting tanker flows and causing refined-product markets to reach new, dangerous extremes as they become the center of the energy crisis.
Last week, Brent briefly dropped below $80 per barrel as hope for a deal between Iran and Oman to open the maritime choke-point grew. However, this week, as talks stagnated, Brent rebounded and is now trading above $90.
Following the most recent surge, the number of Hormuz crossings has leveled down at around 10 per day, down from 30 to 40. In contrast to public expectations of 9 million barrels per day, HSBC analysts have determined that daily liquids flows average around 4 million.
We previously referenced the warning of Jefferies analyst Sam Burwell to clients:
At least for the time being, this indicates that cracks, not crude, are the manifestation of global oil-market pressure. On the other hand, wide fissures indicate that refining runs should be robust, which is good news for crude.
Nearing $100 by Thursday noon, the front-month US diesel crack spread (HOCL1 on the Terminal) had surpassed the $97 level attained in mid-March, when the US-Iran confrontation was barely three weeks old. Diesel is quite tight at that moment.
Clients were earlier cautioned by Francisco Blanch, head of commodities at Bank of America, in a note titled “Diesel’s Perfect Summer Storm” that the industrial fuel is “materially disrupted in 3 of 4 major regions” globally.
The crude truth of oil markets is a recent paper in which we cautioned that supply interruptions are increasing the pressure on petroleum prices.
For various reasons, three of the four main refining centers on Earth are still not fully operational.
First, oil exports from the Middle East have decreased due to military activities around the Strait of Hormuz and its closing; the most recent example of this is the attack on Saudi Arabia’s Jazan refinery by the Houthis.
The second reason is that the global diesel pool has lost a lot of volume due to the record-breaking outages in Russian refining caused by the strikes in Ukraine.
China has not resumed exports of petroleum products to the Asia area because, thirdly, the country is afraid of possible limitations at home. Therefore, record US exports have become more important to Europe in order to cover the shortfall.
Diesel cracks are rising to new seasonal highs as a result of global rivalry for fuel, which is further depleting already-tight US stockpiles. The US is the only major hub that is open for business.
Moscow has banned diesel exports, which is another proof of the world’s depleting supply, in addition to the drone strikes on Russian energy installations in Ukraine:
Russian Export Ban on Diesel Fuel Guaranties Further Price Increases
In a separate development, Citi Research’s managing director and head of energy strategy, Anthony Yuen, took to Twitter to inform clients that the world’s diesel inventories are currently “below the five-year minimum and not substantially lower than this.” He continued, saying, “The last time inventories were at a similar level was in 2022, when gasoil cracks globally were about $20/bbl lower than currently observed, and they were meaningfully lower in 2018.”
Earlier morning, Daan Struyven, a commodities analyst at Goldman Sachs, informed clients:
Our assessment from the start of the Iran war has been that refined products, particularly diesel, are more vulnerable to the Hormuz shock than crude oil.
The refiners’ supply reaction has been robust, with better utilization and a shift in yields toward diesel, in response to near-record prompt diesel margins. Consequently, it is still highly improbable that there would be a diesel shortage this year.
Diesel exports around the world are plummeting, as Struyven demonstrated.
Fuel shipments to the Persian Gulf have decreased by 80% year-on-year for diesel and 48% for crude, according to Kpler data.
Blanch pointed out that, “In short, absent a meaningful supply recovery, the diesel market appears poised to stay tight, volatile, and expensive well into next year.”
In refined-product markets, especially diesel, the blowout in crack spreads suggests a serious worldwide supply squeeze, providing the clearest indication of the extent to which the energy crisis has progressed, even if Brent and WTI remain relatively quiet.
“Manifesting Itself In Cracks, Not Crude,” Jefferies Statements Regarding Hormuz Shock
Market participants were waiting for news on the reopening of the Strait of Hormuz, which caused Brent oil futures to fall from their recent highs of $90 per barrel to approximately $87 early Thursday morning. Some of the world’s leading energy analysts are worried about an impending supply shock, and the ongoing stalemate in talks between the US and Iran has kept prices high.
The US administration’s continued blockade of Iranian ports and Tehran’s demands for reimbursement for war-related damage have kept US-Iran talks at a standstill until the end of the week. The wider peace talks, according to Pakistan, which has mediated, have ground to a standstill.
At the end of Wednesday, Trump stated on Truth Social that the United States had “total control” over the Strait of Hormuz and that “I think we will keep it.” Additionally, it’s more proof that he’s choosing economic siege warfare over the US military effort, which is currently on stop.
Brent crude is expected to rise roughly 5% this week due to the lack of clarity surrounding a near-term US-Iran resolution and the tightening of oil and diesel markets caused by attacks on key infrastructure in Ukraine and Russia.
Europe is facing a double whammy of a diesel and natural gas shortage, as we detailed in last week’s essay “Winter Is Coming” for the continent.
At the beginning of the week, Goldman Sachs’ Samantha Dart, who is also the co-head of global commodities research, told Bloomberg TV that the worldwide shortage of diesel is “what keeps her up at night.”
According to Saxo Markets strategist Charu Chanana, volatility is expected to stay high until the reopening of Hormuz and a clearer production outlook are announced.
Worse yet, in a report released on Wednesday, the International Energy Agency predicted a shortage of 1.8 million barrels per day for the current quarter, which is twice as much as its earlier projection. Additionally, the agency issued a warning about the impact of rising costs on demand and predicted the largest yearly shortage in supply in the past five years.
Crude stockpiles jumped by 17.4 million barrels last week, the biggest gain since January 2023, as imports from Saudi Arabia and Venezuela grew while exports dropped, offsetting higher prices, according to pessimistic US inventory data.
Sam Burwell, an analyst at Jefferies who focuses on energy infrastructure equities, gas, and oil, published a note on Wednesday that included three graphs depicting the oil market’s extremes:
Coming off an earnings hiatus, we’re back to show you the extremes of the global oil market right now. And we’re not just talking about Canada either. While there was an uptick in July, Chinese crude imports are still far lower than their previous run rate. Although crude oil has never spiked to historic levels, diesel cracks are far higher than previous all-time highs, and gasoline is also strong. Although China is still an unknown, we see this arrangement as beneficial for crude (and, by implication, the Canadian oil complex).
All of this points to the fact that, for the time being at least, cracks rather than crude are showing signs of global oil-market tightness. On the other hand, wide fissures indicate that refining runs should be robust, which is good news for crude. Despite a weekly decline, US refinery utilization is still close to seasonal highs not seen in 20 years.
One wonders how long it will be until China starts importing more crude to export more refined products (or simply replace their own product/petchem supplies) given their large cracks, considering China is the wild card when it comes to oil-demand. To what extent China’s purchasing power is still elastic will be shown by imports in the months to come.
To sum up, the markets for refined products, especially diesel, will continue to be the center of attention until the Strait of Hormuz reopens and fuel supplies significantly improve. According to the commodities team at Bank of America, “the diesel market appears poised to stay tight, volatile, and expensive well into next year.” This crucial industrial fuel is facing global shortages. Trump’s MAGA B.S.
