Diesel Dip Gives Record Bullish Oil Trades Pause for Thought
Diesel Dip Gives Record Bullish Oil Traders Pause for Thought
(Bloomberg) -- The soaring diesel market has taken a turn for the worse. That could be bad news for oil bulls who amassed record bets on a rally in crude.
With demand for the fuel accelerating in September after a hurricane knocked out a swath of U.S. refining and fires eliminated processing in Europe’s hub, diesel was credited with underpinning a rally in crude. Brent jumped above $60 a barrel last month and is still on an upward trajectory. But while those refinery issues are normalizing -- and diesel is weakening -- there’s been little let-up in the rally in crude futures. They reached a more than two-year high of $64.65 a barrel on Nov. 7, and remain close to that.
“This will counter the recent support to crude,” Alan Gelder, vice-president of refining, chemicals and oil markets at Wood Mackenzie, said of signs the diesel market is weaker than expected. “Particularly if demand growth turns out to be disappointing” given the importance of diesel as a source of consumption during winter months.
In September, prices for diesel for immediate supply surged relative to later months. ICE gasoil, Europe’s main diesel contract, turned to a structure called backwardation, indicating a more pressing need for supply. Fuel flows to Europe from the Gulf of Mexico all but dried up in the wake of Hurricane Harvey, tanker tracking data compiled by Bloomberg show. The opposite price pattern -- contango -- had largely prevailed since early 2015.
What happens in diesel matters for crude. The fuel is central to the pricing of other so-called distillates that also include jet fuel and heating oil, which together, account for over one third of global oil consumption, according to data from BP Plc.
Speculators have piled back into the oil market with record bullish bets. The net-long position in Brent crude futures and options was the equivalent of 530 million barrels last week, according to ICE Futures Europe data, with more than 10 long positions for each short. Money managers have also been diving into gasoil, where at one point last month there were almost 20 longs for every short, the highest ratio in four years. That bullishness has subsequently faded to 12.6.
Facts Global Energy attributes the strength in distillates mainly to Germany, Europe’s largest market for heating oil, where purchases were strong into July. “The early buying spree has led to full tanks now, which, in combination with a warm winter, could hamper oil demand over the next months,” said Cuneyt Kazokoglu, an analyst at Facts Global Energy.
Still, the dip in diesel could be short-lived. Energy Aspects Ltd., a London-based consultant, says that the weakening reflects the market digesting supplies that were removed from storage. Likewise, Indian refineries delayed routine maintenance until the first quarter of next year, meaning there will likely be reduced supply then. There will also be work on refineries in the Middle East early next year that will further tighten the market, Energy Aspects said.
For now, though, diesel isn’t looking as strong as it did a few weeks ago. The most liquid time spread -- December and January -- is now in a contango of $1.50 a metric ton. It was backwardated by $4.75 as recently as Sept. 21. The fuel’s premium to crude has weakened to just over $12 a barrel from $15.67 in late September.
That weakening is “a bearish flag for the strong demand-growth theme” in crude, said Olivier Jakob, an analyst at Petromatrix GmbH based near Zug, Switzerland. “It is one part of the barrel that is not going in the same direction that the flat price is going.”
To contact the reporters on this story: Alex Longley in London at alongley@bloomberg.net, Bill Lehane in London at blehane@bloomberg.net, Firat Kayakiran in London at fkayakiran@bloomberg.net.
To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net, Rachel Graham
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