Oil prices are at their highest for three years. Global economic growth is especially supporting middle distillate prices, keeping diesel well above petrol at UK retail stations.
Ice Brent futures climbed above $70/bl for a few days in January, for the first time since December 2014, pushed up by a combination of continued cuts by Opec/non-Opec producers and economic growth. The world is recovering from the financial crisis and the IMF has just revised its growth forecasts for 2018 and 2019 by 0.2 percentage points to 3.9%. Greater economic activity stimulates diesel demand from construction and manufacturing, and from trucks transporting goods. This middle distillate demand was exacerbated in January by a cold spell in the north east of the US, the world’s largest heating oil market.
Diesel prices in ARA have more than kept pace with rising crude, widening refining margins further last month to $13/bl, more than $2.50/bl higher than last year. Refiners have been pushing as much crude through as possible to capture this margin.
In the process they have overproduced gasoline, especially for this time of year, leading to a glut. Low seasonal gasoline consumption usually squeezes margins in the winter, and the Eurobob gasoline crack spread was especially weak in the first half of January, below $6/bl. Stronger margins in the second half of January point to refiners starting to pull back as they prepare for the spring maintenance season.
A lighter crude slate has also helped swell gasoline output. The 1.7mn b/d of crude output that Opec and its non-Opec partners have cut is mostly heavy crude. And much of the higher US production that is partially filling the gap is light.
The wholesale spread between diesel and gasoline has kept the diesel premium to petrol at the UK pump at around 3ppl.
A downward correction of crude prices is partly due to a stronger US dollar, but also underscores the effect of current price levels on supply. It is now attractive for US shale producers to push out more crude and this has raised output to close to the highest ever. Opec members will find it increasingly difficult to stick to their agreed cuts.