(Bloomberg) — In all the hullabaloo of OPEC+ prolonging the deepest production cuts in history, it’s easy to overlook ominous signals for oil prices — and the wider economy — that are emanating from the diesel market.
The world’s largest crude oil producers agreed on Saturday that they would extend collective output curbs, effectively keeping 1/10th of supply off the market for another month. While the measures may be tightening the global crude market, potentially driving prices higher, they do almost nothing to address grim margins that refineries are earning when selling diesel, one of the most important petroleum products that the industry churns out.
“The world’s awash with diesel,” said Alan Gelder, vice president for refining, chemicals and oil markets at consulting firm Wood Mackenzie Ltd. “There’s just loads of it everywhere.”
Away from Europe, where diesel often powers cars, the fuel is also widely consumed by industry: things like freight to move goods around, as well as in construction and agriculture.
And while demand has recovered strongly in Asia — in particular China — since the coronavirus first broke out, markets in Europe and the U.S. are barely being propped up by increased online shopping and need for delivery. The economic recession means there’s been a much bigger hit to the amount of freight that’s being moved around.
The bigger problem right now, though, is supply. Refineries — particularly in Europe and the U.S. — are trying to make as little jet fuel as possible because demand from the aviation industry still remains far below where it was before the pandemic struck. And that means producing more diesel. Similarly, refineries cannot meet a recovery in gasoline consumption without boosting their overall processing rates — and that too brings more diesel.
In the U.S., where it’s a seasonally weak consumption period anyway, diesel supplied, the main measure of demand, last week hit the lowest weekly level in 21 years, tumbling to just 2.72 million barrels a day, according to the Energy Information Administration. At the same time, stockpiles have grown for nine straight weeks to sit at the highest since 2010.At the start of the pandemic, diesel was one of the few relative positives in oil markets as the world began going into coronavirus lockdowns. The trucking industry was still running at full speed to stock up supermarkets. Now, margins on making the fuel in the U.S. are hovering near a 10-year low.
“The bright spot has shifted from diesel to gasoline,” said Stephen Jew, director of global refining and marketing at IHS Markit. “The refiners are profit driven and can adapt quickly, and they will always try to find the bright spot. They will be chasing the gasoline.”
It’s not possible for refineries collectively to completely stop making diesel and jet fuel, especially if they increase runs to meet demand for gasoline. So a diesel glut will likely linger until there is a broad economic recovery, including a resumption in air travel.
“In our mind, the problem gets worse before it gets…