The re-escalation in the Middle East and the Russian ban on diesel exports amid incessant Ukrainian drone attacks on refineries have pushed middle distillate cracks to record highs this week.
The renewed exchange of strikes in and around the Strait of Hormuz has erased hopes of a swift recovery of oil product flows from the Middle East, leaving the diesel markets tight, ING’s commodities strategists Warren Patterson and Ewa Manthey wrote in a note early on Wednesday.
The market tightness is most evident in the diesel market, where the ICE gasoil crack, the pricing difference between a barrel of crude oil and the diesel refined from it, hit on Tuesday a record high of $79 per barrel. At the same time, the diesel crack in the United States is trading well above $100 per barrel, hovering near the all-time highs hit last month.
“Timespreads reflect this acute tightness, with the ICE gasoil Sep/Nov spread trading at a backwardation of $80/t,” ING’s commodities strategists said.
Backwardation is the market structure in which prompt contracts trade higher than those further out in time, signaling concerns about immediate supply.
“Given disruptions to Middle East and Russian diesel exports, and with little sign of an imminent recovery, middle distillate cracks are likely to remain highly elevated and volatile, particularly as we move towards seasonally stronger demand,” they noted.
“The global refining system has little slack to make up for the disruptions we are currently seeing.”
Since the middle of June, diesel prices globally have outrun the gains in crude oil prices as a combination of factors continues to tighten the diesel markets. These factors include the wars in Iran and Ukraine, which stifle product supply out of the Middle East and Russia, while Chinese fuel exports have yet to meaningfully rebound following months of restrictions to protect domestic supply, with the Strait of Hormuz flows still below pre-war levels.
Refiners are set to reap stronger profits on the global diesel shortage, Goldman Sachs said last week, revising its earlier profit forecast to double the total profits that refining companies would make from the squeeze.
By Tsvetana Paraskova for Oilprice.com
