Gasoline dark, when diesel defies fears of recession


London (awp/afp) – The prices of petrol and its close cousin diesel, two petroleum products, have been moving in a totally uncorrelated fashion for several weeks: if one is plummeting, the other is holding up, defying the gloomy outlook of the world economy.

“Petrol is under great pressure, but diesel is going in the opposite direction,” says Andrew Lebow of Commodity Research Group.

Inventories of gas oil, also commonly known as diesel, “are tight overall, globally”, he says, notably lower by 23% than their average level for the last five years at the same time in the United States. .

Diesel oil and gasoline come from a different refining process than crude oil.

“Diesel is denser and fuels trucks, trains and buses, while gasoline is mainly for cars,” Edward Moya, an analyst at Oanda, told AFP.

“Much of the world still runs on diesel and most consumable goods depend on it, while gasoline is more subject to consumption trends,” he continues.

The war in Ukraine has shown that “Europeans depended on Russia for a large part of diesel production”, underlines Michael Lynch, president of Strategic Energy & Economic Research, interviewed by AFP.

Seb Research estimates the share of diesel imported from Russia by the European Union at 800,000 barrels per day.

Added to this is an energy crisis exacerbated by soaring gas prices, which have tripled in Europe since the start of the year.

Last week, the announcement of a temporary interruption of Russian gas deliveries via the Nord Stream 1 gas pipeline even propelled the price of the Dutch TTF futures contract, the benchmark for natural gas in Europe, up to 342.005 euros per megawatt hour ( MWh), only 3 euros from the historic record reached in mid-March in the first days of the Russian invasion of Ukraine.

Substitute for natural gas

Gas and crude oil are only marginally substitutable, gas being mainly used for heating, to produce electricity, or in heavy industry such as for the manufacture of cement or chemical products, when oil is used mostly fuel.

But gas prices, recently pushed to stratospheric levels, have prompted a search for alternatives, for example pushing some countries to reconnect with highly polluting coal.

And diesel can be a “good substitute for natural gas in many applications: petrochemicals, electricity, heating”, lists Bjarne Schieldrop, analyst at Seb Research, interviewed by AFP.

Diesel as a heating oil therefore appears to be the ready-made alternative, its prices remaining disproportionate to those of gas, in particular as winter approaches.

“The hunt for diesel and heating oil is open,” quips Mr. Schieldrop.

In early August, the International Energy Agency even revised upwards its forecast for global oil demand for the second half of the year, arguing that heat waves and soaring gas prices had already prompted country to switch fuel for electricity generation.

Shield on demand

At the same time, demand for gasoline is bearing the full brunt of growing fears of recession, as the global economic outlook is darkening.

“Gasoline futures have weakened,” notes Phil Flynn of Price Futures Group, “raising greater concerns about an economic slowdown.”

“The usual seasonal increase in gasoline demand in the United States this summer has been particularly disappointing,” said Stephen Brennock analyst at PVM Energy in a note.

The period extending from the end of May to the beginning of September, called “driving season”, is however usually the high time of demand for this fuel in the country.

The natural gas substitute attribute and its extreme price levels offer diesel a shield against fears of recession.

Andrew Lebow wonders, however, if diesel, listed on the New York Mercantile Exchange, will not be overtaken by the gloomy economic context: “demand for diesel should be much weaker than it is”, says Andrew Lebow. “And maybe in the weeks to come we’re going to start to see it fall apart.”

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