Diesel Markets Plummet as Traders React to Covid Variant

(Bloomberg) -- Diesel markets plunged as traders reacted to news about a new Covid variant discovered in South Africa. 

In Europe and Asia, diesel’s value relative to crude oil fell to its lowest in months, according to fair value data compiled by Bloomberg. The drop was sharpest in Singapore, where the crack was as low as $5.72 a barrel. It pared losses to $9.96 a barrel at 10:18 London time. In the U.S. it was also down on the day. 

The fuel’s forward curve is also showing signs of pressure in northwest Europe, with the price for prompt delivery earlier flipping to a discount versus the following month. This structure, known as contango, signals market weakness and has not been since since early October. 

“There were concerns about increased cases in Europe and lockdowns in some countries already,” said Jonathan Leitch, an oil market analyst at Turner, Mason & Co. “The new variant brings with it a more global risk. This means we could see less diesel demand if workplaces are forced to close and there could be a wider slowdown in economic growth.”

Stocks, treasury yields and oil all fell earlier on Friday as news of the new variant roiled financial markets. The European Union has proposed to halt air travel from southern Africa, while the U.K. will suspend flights from six African countries from midday. South Africa’s health minister described the variant as of “serious concern” and it also been detected in Israel. 

The price of jet fuel is also down, both against crude oil and diesel, fair value data show. Jet fuel was the part of the oil barrel that was hit hardest by the pandemic, with travel restrictions slashing demand.

A significant drop in jet fuel demand is also potentially relevant for diesel. That’s because refiners can tweak operations to essentially turn excess jet fuel into diesel -- increasing supplies of the latter.

Europe’s diesel market had already been showing signs of weakness. Ultra low-sulfur diesel barges recently flipped from a sharp premium against ICE Gasoil futures to a discount, according to data from S&P Global Platts. People involved in the diesel market pointed to negative demand sentiment -- Austria is in lockdown and Germany is considering one -- rather than definitive signs of weaker consumption.

On Friday, four people involved in the diesel market linked the weaker picture to the new variant.

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