Diesel Squeeze in Europe Set to Deepen, Morgan Stanley Says
(Bloomberg) -- A diesel squeeze is playing out across Europe as a slew of major supply challenges coincide, according to Morgan Stanley, which flagged record refining margins in the region and slumping stockpiles.
“The picture is genuinely tight,” analysts including Martijn Rats said in a July 19 note. “Our supply/demand modeling points toward European diesel inventories falling to multi-year lows toward year-end,” they added.
Global energy markets have been jolted this month by the fresh flare-up in the US-Iran war, although petroleum product prices have rallied harder than underlying crude oil. The market for diesel — a workhorse fuel that powers trucks, agriculture and industry — has been tightening on a host of factors including the disruptions in the Strait of Hormuz, but also Ukrainian attacks against Russian refineries, and a diesel-export ban imposed by Moscow.
“The real bottleneck in the oil system right now is refining, more so than crude,” the analysts said, pointing to some unsold African oil cargoes, as well as bearish contango pricing in some parts of the market. “The epicenter of all this is the diesel market, and Europe in particular.”
Diesel-refining margins in Northwest Europe — known as crack spreads — have surged to a record, they said. Local stockpiles are expected to draw steadily from August, reaching a low of about 299 million barrels in November - the smallest for the time of year since at least 2015, they added.
Further afield, industry conditions in China were also contributing to the tightness as refiners processed less crude. “China never supplies Europe with diesel directly,” the analysts said, but when “China runs less, there’s simply less product in the global system to spill westward.”
Still, Morgan Stanley cautioned that the tightness was already reflected in prices, advising investors against betting on more gains from current levels. The market is “full priced — don’t chase,” they said.
European diesel futures traded as much as 3.5% higher at $1,219.50 a ton on Monday, the highest level since May 20. In crude oil, Brent contracts rallied to top $90 a barrel, taking gains this month to 24%.
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