Oil prices continue to lag when compared with other strings of the investment instruments. There does seem an inevitability in how immunity sets into the sentiment of the oil fraternity which at present incrementally loses notions of disruption to the oil flows of the Middle East. The first exchange of missiles between Iran and Israel was an orchestrated affair, but still managed a dizzying high of just over $92/barrel in Brent. Since then, warfare has been more widespread, more violent and less predictable, yet prices are $20/barrel lower as pragmatism continues to conquer periods of understandable anxiety and price hikes. Another bout of violence over the weekend sees Israel targeting the financial centres of Hezbollah activity in Beirut but sadly such destruction and loss of life has become humdrum and until a missile by design or chance happens upon a significant part of oil communication, so it will remain.

Proof lies in the fortune of the prices of last week. M1 WTI futures finished -$6.34/barrel (-8.39%), Brent -$5.98/barrel (-7.57%), Heating Oil -19.17c/gallon (-8.18%), RBOB -14.96c/gallon (-6.95%) and Gasoil -$61.25/tonne (-8.63%). With the US increasing production to all-time highs while rig counts decrease and whatever stimulus China may or may not continue to roll out, its struggling oil sector (alluded to below) leave oil as a miserable hangdog when compared with other geopolitical reactions. Kamala Harris' campaign by some media standards has become stuck in the mud and whatever one might think of Donald Trump, he is charismatic. The former President's improved standing in recent polls sees a 'Trump trade' and with it investor anxiety as there remains only 2 weeks until the US election. Seemingly counterintuitive, both the US Dollar, now at 3-month highs, and Gold at all-time highs, are twinned with a bout of safe-haven buying even witnessed in Bitcoin as it approaches YTD and its own record high. Tax, tariff and immigration from The Donald and earth scorching from Israel does not seem to have a place for oil at present.

The world continues to fall out of love with Diesel

One of the remedies to over-exuberant oil prices when rallied by Middle East conflict news continues to be the state of generic distillate in all its forms. As much as oil watchers still suffering from a bullish bent are pleased to see something of a rekindling in the idea of a change of China’s fortunes due to stimulus and the like, there remain warnings of a fall from grace for Heating Oil, Gasoil and Diesel not only in China, but across the globe that are increasingly hard to ignore. For China, the recent data concerning refining offers testimony to not only a poor domestic situation but an international one for the world’s worker fuel. Customs data show exports of diesel dropping to 350,000 tons in September, a straight halving of outflow seen in August. The state of demand has caused refiners to implement strategic shuttering in some instances, with other processors having to reduce run rates on economic grounds. This stark state of affairs can be seen in how analysts believe that there remain 9 million tons of refining quota unused. Data from OilChem offers an insight into the costs involved and why exports have dropped so sharply. Diesel margin has fallen in August from CNY82/ton to CNY46/ton in September and that exports will decrease by 30% in October versus the previous month.

In August, Kpler, forecasted China’s Gasoil demand would peak in 2026 and along with many, joined in the concern surrounding the current macroeconomic contraction offered by various sets of data from PMIs through GDP and into the deflation exhibited in recent CPI and PPI data. Across all sectors, namely transportation, power, property and agriculture a state of 2-3% decline is forecasted annually into 2040. Using information from the Chinese Association of Automobile Manufacturers, diesel cars are now only responsible for 1% of sales and in kind make up only 5% of all diesel demand in the country. The greatest diesel demand is still derived from heavy transportation road vehicles but even that is under threat as trends suggests that a mass replacement is underway from LNG powered trucks. Domestic and foreign markets are both offering weak custom.

In the United States and looking at last week’s Inventory Report, implied demand is flat; 4.6% down on last year and with stock levels -10.780mb or -8.6% against the 5-year average, a picture can be painted as to the lack of keenness to hold inventory even when approaching the winter turnarounds for refiners. Such is the weakness of demand that the US now finds itself the second-largest source of diesel for the EU behind Saudi Arabia.

Such competition for fuel space into the old continent would suggest a healthy market. None of it, it is just the lack of refining in Europe made stark by the continents’ constituent headlong rush into nation green-boasting. According to OPIS, demand for road diesel in the European Union shrank by another 1.8% in the first six months of 2024. The heavyweight influence of Germany and France is recorded in how each country’s Diesel demand fell by 4.6% and 4.7% respectively. The PMIs of each also serve almost perpetual warning on degradation of manufacturing and industry. Germany’s HBOC Manufacturing PMI at 40.5 was the lowest in a year, whereas France was only just slightly better at 42.8, and an 8-month flunk. As heavy-duty vehicle fuel use is aligned with the servicing of industry, trucks are then making fewer trips. OPIS goes on to expand that the Gasoil fuels of heating, marine, rail and petrochemicals fell 5.8% in the first half of this year.

Our besottedness with middle-distillate may sound like broken record. However, and the variation is vast, the workhouse fuel makes up 30-50% of refiner’s capacities. Even at the lower end it is a massive dent in potential call for crudes all over the world and while this situation remains, our view that the high of 2024 and indeed 2025 is in, with the obvious Middle East disclaimer in small letters at the bottom of the statement.
 

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