Stocks of diesel and other middle distillates are below the typical levels globally, and if the industrial economies of North America and Western Europe emerge from their prolonged recession in 2024, prices could see a rapid increase.
Inventories of diesel, heating oil, and gas oil were lower than the 10-year seasonal average across North America, Europe, and Singapore in January, leading to upward pressure on fuel prices.
Investors have taken notice and have amassed a position equivalent to 56 million barrels in the two major futures and options contracts tied to middle distillates, up from 20 million barrels in mid-December.
Diesel and other distillate fuel oils are crucial for the industrial economy, widely used in manufacturing, freight transport, and construction, making them the most sensitive fuels to the condition of the business cycle.
Recent data confirms that manufacturers in the United States are poised to return to growth after a shallow cyclical downturn in 2022/23, while European manufacturers are also showing signs of the sector’s recovery from the downturn caused by the surge in energy prices following Russia’s invasion of Ukraine in 2022.
Traders anticipate that both the US Federal Reserve and the European Central Bank will reduce interest rates this year, potentially boosting the cyclical upswing.
As a result, global distillate inventories are likely to remain below average and could tighten further, adding to the upward pressure on prices.
In the United States, distillate fuel oil stocks were at their lowest for the time of year since 1951 at the end of November 2023, and inventory levels remain below the seasonal average.
In Europe, inventories were below the 10-year average at the end of December, and in Singapore, distillate stocks were below the 10-year average in January.
Distillate supplies have been disrupted by various factors, including Ukraine’s drone attacks on Russian petroleum refineries and Houthi attacks on shipping in the Red Sea and the Gulf of Aden.
Benchmark crack spreads for gasoil delivered in Northwest Europe in April 2024 have seen an increase so far in February, signaling potential price increases.
Although the impact on end-users has been limited thus far due to fairly stable crude prices, further tightening of gasoil inventories could potentially lead to a sharp rise in diesel prices in 2024.
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