Diesel demand is underpinning bull market

Step aside Opec, diesel is now driving up oil prices. With industrial activity surging worldwide, the fuel – known in the industry as ultra-low sulphur diesel or ULSD – is enjoying strong demand, accelerating total oil consumption growth in 2017 well above the 10-year average.And just as demand rose faster than expected, diesel supply was hit, prompting a rapid tightening. First in Europe: the Pernis refinery, owned by Royal Dutch Shell and considered one of the region’s diesel machines, suffered a fire in July and shut down for several weeks. And then in the US, where Hurricane Harvey in late August temporarily knocked out a dozen refineries, disrupting both domestic supplies and distant export markets.“The oil market is currently driven by four letters: It’s ULSD, not Opec,” said Olivier Jakob, managing director of consultant Petromatrix GmbH.The combination of strong demand and refinery outages has drained global diesel stocks over the summer, a rare occurrence as inventories usually build from July to September in preparation for a seasonal uptick in demand with the onset of the northern hemisphere winter. A cold spell later this year or in early 2018 could tighten the market even more, triggering another price spike.European diesel benchmark prices have surged above the $550 a metric tonne level for the first time since July 2015, up from $409.50 just three months ago. In addition, the diesel market has moved solidly into a condition called backwardation – where near-month contracts are more expensive than those for later dates – a sign of market tightness.Surging demand comes amid calls to ban diesel vehicles in the wake of an emissions scandal involving Volkswagen, triggering the recall of about 5mn cars in Germany. Despite the hit to the company’s shares and to confidence in the industry, diesel continues to be a key driver in global oil markets.“Diesel demand is very strong on the back of industrial demand, freight and construction activity,” David Fyfe, chief economist at commodities trader Gunvor Group Ltd, one of the world’s largest oil traders, said in an interview.Hedge funds have noticed. In the US, hedge funds boosted their net positions on diesel to the most bullish in four years, according to data from the Commodity Futures Trading Commission.The diesel market has been a key topic of conversation at the annual Asia Pacific Petroleum Conference in Singapore this week, with traders largely agreeing the outlook is bullish. With diesel stocks low and prices rising, refiners are enjoying strong margins, prompting them to buy more crude. That, in turn, is giving a lift to the oil market itself.Brent crude, the global benchmark, settled near $60 a barrel this week – its highest since level in two years.Although the refinery outages are starting to ease, perhaps prompting a pause in the diesel market, oil traders and refining executives said the backdrop of strong demand remains for middle distillates – a category that includes diesel, heating oil and jet-fuel.“When you have strong economic growth, particularly in emerging markets, like today, you are going to have middle distillates up,” Franco Magnani, the chief executive officer of Eni Trading & Shipping Spa, said in an interview in Singapore.It’s not just strong consumption in Asia. Diesel demand is strong too in Europe and it’s accelerating notably in the US, in part due to reconstruction activity linked to the hurricanes Harvey, Irma and Maria in Texas, Florida and Puerto Rico, traders said.US demand for distillates rose to 4.26mn bpd for the week ended September 15, about 24% higher than the same week a year ago and the highest seasonal level in at least 20 years, according to government data.