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By Adewale Sanyaolu
Global stocks of diesel and other middle distillates are below normal and prices could start to rise quickly if the industrial economies of North America and Western Europe emerge from their lingering recession in 2024.
Inventories of diesel, heating oil and gas oil were below the prior ten-year seasonal average across North America, Europe and Singapore in January, which has begun to exert upward pressure on fuel prices. Investors have already noticed and amassed a position equivalent to 56 million barrels in the two major futures and options contracts tied to middle distillates up from 20 million barrels in the middle of December.
Diesel and other distillate fuel oils are the workhorse of the industrial economy, widely used in manufacturing, freight transport and construction, and therefore the most sensitive fuels to the condition of the business cycle.
Recent data has confirmed manufacturers in the United States are poised to return to growth after a prolonged though shallow cyclical downturn in 2022/23.
European manufacturers have experienced an even longer and much deeper downturn caused by the surge in energy prices following Russia’s invasion of Ukraine in 2022. But in Europe too there are signs the worst of the downturn is now over and the sector will return to growth before the end of the year.
Traders anticipate both the U.S. Federal Reserve and the European Central Bank will cut interest rates this year which would turbocharge the cyclical upswing. As a result, global distillate inventories are likely to remain below average and could easily tighten further, intensifying the upward pressure on prices.
In the United States, distillate fuel oil stocks amounted to 114 million barrels at the end of November 2023.
