Diesel Becomes a Dirty Word for Oil Traders

With demand for the fuel accelerating in September after a hurricane knocked out a swath of U.S. refining and fires eliminated processing in Europe’s hub, diesel was credited with underpinning a rally in crude. Brent jumped above $60 a barrel last month and is still on an upward trajectory. But while those refinery issues are normalizing — and diesel is weakening — there’s been little let-up in the rally in crude futures. They reached a more than two-year high of $64.65 a barrel on Nov. 7, and remain close to that.

“This will counter the recent support to crude,” Alan Gelder, vice-president of refining, chemicals and oil markets at Wood Mackenzie, said of signs the diesel market is weaker than expected. “Particularly if demand growth turns out to be disappointing” given the importance of diesel as a source of consumption during winter months.

In September, prices for diesel for immediate supply surged relative to later months. ICE gasoil, Europe’s main diesel contract, turned to a structure called backwardation, indicating a more pressing need for supply. Fuel flows to Europe from the Gulf of Mexico all but dried up in the wake of Hurricane Harvey, tanker tracking data compiled by Bloomberg show. The opposite price pattern — contango — had largely prevailed since early 2015.

What happens in diesel matters for crude. The fuel is central to the pricing of other so-called distillates that also include jet fuel and heating oil, which together, account for over one third of global oil consumption, according to data from BP Plc.

Speculators have piled back into the oil market with record bullish bets. The net-long position in Brent crude futures and options was the equivalent of 530 million barrels last week, according to ICE Futures Europe data, with more than 10 long positions for each short. Money managers have also been diving into gasoil, where at one point last month there were almost 20 longs for every short, the highest ratio in four years. That bullishness has subsequently faded to 12.6.
more at:  https://www.bloomberg.com/news/articles/2017-11-09/diesel-dip-gives-record-bullish-oil-traders-pause-for-thought