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Diesel Premium May End

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“Refiners are producing a lot more of this stuff.”

Diesel prices in many parts of the world should drop below gasoline this summer for the first time since mid-2007 as refinery projects lift output and slumping economies slash transport and manufacturing demand.

The expected shift would restore the typical balance between the two fuels, market participants around the world said. Diesel, closely related to heating oil, traditionally has been more costly in the Northern Hemisphere in winter but cheaper in the summer when temperatures rise and U. S. gasoline use peaks.

“I’d say there’s a fairly good chance that we could see gasoline regain its price premium this summer for the first time since the summer of 2007,” said Peter Beutel, analyst at Cameron Hanover in New Canaan, Conn.

The premium of NYMEX heating oil, the U. S. diesel benchmark price, to gasoline has dropped from US43 cents per gallon to just over US10 cents per gallon in the past month. U. S. and European retail pumps have seen a similar move.

“It would not be unheard of to see distillate prices drop to a discount to gasoline, given the forces at work,” said Tim Evans, analyst at Citi Futures Perspective in New York.

Analysts said a key reason diesel’s relationship to gasoline may revert back to normal is that refiners have expanded their distillate capacity to cash in on a recent demand boom from the freight and electricity sectors.

It was this global demand increase that pulled diesel prices well above gasoline for the entirety of 2008.

“The distillate yields from refineries are up substantially because refiners have boosted their coking capacity,” said Evans. “Refiners are producing a lot more of this stuff.”

But the increased yields are coming on just as a worldwide economic slowdown triggers a dramatic decline in energy consumption that has hit diesel-intensive global freight more severely than commuting and discretionary road travel.

Refiners have also been cutting production in the U. S. and parts of Europe and Asia to combat sagging profit margins. Those cuts tend to have a more dramatic impact on gasoline than distillates due to the higher distillate yields.

“Generally, you get two times more diesel than gasoline in a typical refinery,” one trading source said.

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