Recent developments in the global oil market have seen diesel profit margins plummet due to a combination of increased refinery output and a slowdown in demand. The slump in margins has been attributed to mild weather in the northern hemisphere and a general economic deceleration, impacting one of the key fuels used in industry and transportation.

In Asia, the response from refiners to the decreasing margins has been to cut down on crude oil processing, thereby reducing diesel production. This move comes as crude oil prices have seen a significant drop in recent weeks, further pressurized by the upcoming OPEC+ meeting in early June. The meeting will determine whether the supply cuts instituted since late 2022, totaling 2.2 million barrels per day, will be maintained beyond June, contingent on a potential demand recovery.

Brent crude prices reached a two-month low of under $82 a barrel on May 8 but saw a partial recovery, although they are on course for a 4% decline this month after four months of consecutive gains. Amidst the uncertainty, JP Morgan suggested that OPEC+ might "need to contend with the mixed performance in refined product markets," where gasoline crack spreads have improved, but diesel cracks "have markedly deteriorated."

The diesel refining margins in Europe have seen a dramatic fall to below $16 per barrel in late April from over $40 in February, with the U.S. diesel crack spread reaching a 2-year low during the same period. In Asia, diesel margins averaged $17 a barrel in April, a decrease from the first quarter's $22.

A mild winter has been cited as one of the reasons for reduced diesel demand, alongside an increase in global refining capacity, which saw its largest rise since 1977. In addition to the output from new projects, StoneX projected a further 200,000 barrels per day increase in diesel capacity for the current year.

Moreover, shifts in consumer behavior, such as the transition to hybrid or electric vehicles in Europe and the growing use of biofuels in the U.S., are contributing to the declining diesel demand. Analyst Natalia Losada from Energy Aspects pointed out that "the issue is more related to the general industrial slowdown... and to the car fleet slowly moving away from diesel."

The diesel futures market has been trading in contango since mid-April, signaling an oversupply and encouraging traders to store fuel for future profit. In contrast, the crude market remains in backwardation, indicating tightness.

Despite the strained margins, some support for Asian diesel may arise from reduced Chinese exports due to refinery maintenance and the potential uptick in demand for jet fuel driven by increasing air traffic.

As the market continues to adjust to these dynamics, the upcoming OPEC+ decision will be pivotal in shaping the future course for diesel margins and overall oil prices.

Reuters Article