The U.S. diesel futures crack spread, a measure of profitability for refiners, hit a three-week high as analysts said supply tightness for the product is set to persist even after a preliminary deal was reached to end the Iran war.
The crack spread, calculated as the difference between the price of U.S. ultra-low sulfur diesel futures and U.S. crude oil benchmark West Texas Intermediate futures, settled at $62.84 a barrel on Thursday, the highest since June 3, LSEG data showed.
Resilient diesel refining economics reflect a cautious approach to fuel markets by traders wary of being caught offside if tensions flare up again in the Middle East. Diesel markets have been among those hit hardest by the blockade of the Strait of Hormuz as the waterway is critical to global supplies of both the fuel and Middle Eastern crude grades well suited for its production.
“It is pretty clear at the moment that oil market tightness is concentrated in products rather than crude, so it is probably a safer way to play upside,” said Rory Johnston, founder of the Commodity Context newsletter.
Johnston added that Russian fuel exports are very low due to damage to refineries there from Ukrainian drone attacks, adding to supply tightness in the diesel market.
DIESEL MOST SENSITIVE TO MIDDLE EAST CONFLICT
To be sure, the diesel crack spread, similar to the broader oil market, has dropped sharply in recent weeks due to progress in U.S. negotiations with Iran to end their war and reopen the Strait of Hormuz. At its peak in March — the first month of the Iran war — the U.S. diesel futures crack spread was above $90 a barrel, and even higher in physical markets.
However, the decline in diesel prices and crack spreads has been much softer than crude oil. Since the start of this month, WTI futures have slumped about 22%, while ULSD futures have dropped just over 9%. Meanwhile, even as a number of stranded ships have exited the Strait of Hormuz in recent days, tensions remain heightened after a container ship was hit near Oman on Thursday and the United Nations paused its efforts to shepherd vessels and seafarers through the waterway. Diesel inventories are the tightest among all refined products, making the fuel most sensitive to developments in the Middle East, brokerage StoneX wrote to clients on Thursday. U.S. distillate fuel inventories, composed mainly of diesel and small amounts of heating oil, were at 106 million barrels as of June 19, some 12 million barrels below the five-year average, data from the Energy Information Administration showed.
(Reporting by Shariq Khan in New York; Editing by Sanjeev Miglani)