Cheap Crude, Dear Diesel - Why Crack Spreads Are So High

Research evidence excerpt

Cheap Crude, Dear Diesel - Why Crack Spreads Are So High

IdeaMsupply/demand model doesn't currently capture.

Exhibit 13: German household have yet to start filling their heating oil inventories ahead

of the winter, which is a source of upside to our demand forecasts

European demand - two-way; persistent

Diesel demand is clearly price-sensitive: European consumption fell hard in May after

diesel prices had spiked to ~$1,400/tonne in April, and recovered in June after they had

fallen back below $1,000/tonne. There's a live debate over whether European diesel

demand is structurally lost - to EVs and efficiency - or just cyclically weak. At the moment,

the diesel crack spread is high, but consumers pay the flat price, not the spread. At the

current price of $1,200/tonne, there is probably still room for flat price to go higher

before demand destruction re-engages around the April level.

The US SPR crude wind-down - skews bullish; persistent

Section 1 covered how the loss of US SPR crude is already squeezing European diesel

yield. It belongs here too because most of the effect is still ahead. The releases have

already dwindled to almost nothing, and it's from late August - once refiners have worked

through the last of that cheaper feedstock - that the risk shifts from lower yield to lower

runs. European refiners came close to cutting runs in April, before the SPR crude arrived,

when margins briefly went negative. Unlike the Russian ban or Hormuz, this one doesn't

reverse: the SPR crude isn't coming back.

The backfill: can Europe pull the barrels in - skews bullish; temporary

The lesson of the past few months (and also the European gas market) is that Europe

doesn't typically run short, even with almost no Gulf product, because arbs do their job: