Diesel prices are currently below the normal, but there are indications that they could surge this year as economies in North America and Western Europe recover from a prolonged recession and business activities pick up pace.
Inventories of diesel, heating oil, and gas oil have remained below the ten-year seasonal average in January across regions like North America, Europe, and Singapore, according to OilPrice.com. This trend has been exerting upward pressure on fuel prices.
Investors have been taking notice, with holdings in the two major futures and options contracts for middle distillates reaching 56 million barrels, marking a significant increase of 36 million barrels compared to December’s positions.
The forecast for rising prices is rooted in expectations of a rebound in U.S. manufacturing activity, which has experienced a prolonged slowdown. Similarly, European manufacturing is showing signs of recovery, with projections suggesting a return to growth by the year’s end.
Traders are also anticipating potential interest rate cuts by the U.S. Federal Reserve and the European Central Bank, which could further stimulate manufacturing activity and contribute to the drawdown of middle distillate inventories, thereby supporting prices.
According to the latest Weekly Petroleum Status Report by the EIA, distillate fuel inventories in the United States are currently 5% below the five-year average for this time of year, standing at 130.8 million barrels as of January 26.
Similar trends are observed in Europe, with inventories around 5% below the 10-year average, and in Singapore, where inventories are notably lower, standing at 33% below the 10-year average as of January.
With the potential for further tightening of gasoil inventories alongside the anticipated manufacturing uptrend and efforts by OPEC+ to stabilize crude oil inventories and prices, there is a significant possibility of a sharp increase in diesel prices in 2024, as noted by John Kemp in Reuters on Tuesday.