THE DIESEL CRUNCH - PART II
As you read in Part I, diesel is a critically essential product in short supply. Prices for the internationally traded fuel are rapidly on their way up, even as oil fluctuates while economies and equities fitfully sink towards recessionary levels. Europe is more vulnerable than the US to diesel shortages. Russia has been supplying some 10% of European diesel imports, though under current EU sanctions those are supposed to be ended by February.
“We’ve run out of hyperbole to describe diesel crack spreads (margins) this year, says Rebeka Foley of S&P Global Platts in London. Her firm now projects diesel cracks to reach $65/barrel over the price of oil. Other less conservative market analysts are saying that prices could reach $70 or higher, compared to the $10 to $13 that might be expected in a less disrupted year. That’s if the market is not disrupted by EU or UK rationing, or an even deeper recession than what’s anticipated.
Most of the time, professional commodities traders follow the advice I was given on my first day on the desk at Mocatta & Goldsmid, at that time the largest gold trader in the world. As my soft-spoken boss intoned, “If you’re doing everything right, most of the time this is a nickel and dime business”, he said, and of course he was right. Don’t take a directional price view, find arbitrages, hedge away every risk you can find, follow the rules set by compliance, take a tiny profit and survive to trade the next day.
Yes, most of the time. Right about now, though, there will be partners at oil trading firms, or even junior clerks, who may be getting that ‘get rich or die tryin’ feeling when they look at the diesel screens. After all, it’s happened before. Remember Marc Rich, who founded an early iteration of Glencore, the huge metals and coal conglomerate that, as I recall, has settled its issues with the Justice Department?
Back in 1979, though, when the US first imposed sanctions on buying Iranian oil, Marc Rich allegedly found a way around them by using “daisy chains” of offshore purchasers, so the Government would never realize what he was up to. But the dumb old Government was not quite dumb enough. Rich had to flee prosecution, first becoming a Spanish citizen, then a Swiss resident, and finally, in the very last days of the Clinton Administration, received a presidential pardon. He died very rich in Switzerland. Very very rich…
The US government and the EU have become much more sophisticated now, but then so are their global opponents. And it’s not as easy for EU members to cut commercial ties with Russia as completely as the U.S. did with Iran.
But let’s set the more baroque parts of the oil business aside for the moment, because there are other complications with the diesel trade right now. To begin with, even though the US refiners have been vigorously exporting diesel to Europe and the UK, ARA Gasoil stocks (i.e., Northern Europe wholesale inventories) at just over 11 million barrels remain extremely low, around half the level they were just before the pandemic.