Diesel Passes $105 a Barrel on Mideast Worry and Key Spreads Rip

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(Bloomberg) — Diesel soared for a fifth day — topping the equivalent of $105 a barrel in Europe — with spreads that traders view as measures of market strength spiraling higher.

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Concern about imports from the Middle East, where Israel’s conflict with Iran is roiling wider oil markets, is compounding what was already a tight market. Europe has become increasingly reliant on the region’s fuel since losing Russian supply.

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The premium of benchmark diesel futures to crude in Europe breached $25 a barrel, the fifth straight day of sharp gains and the highest the marker’s been since March 2024. Outright prices, normally quoted in tons, surpassed the equivalent of $107 a barrel on Thursday.

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The supply concerns have sparked a rush to the exit for bearish bets. In the week to Friday — covering just the first day of the conflict — investment funds cut their wagers on weaker diesel prices by the most since October.

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“Supply-security fears” are behind the strength in European diesel, said Eugene Lindell, head of refined products at energy consultancy FGE NexantECA. “Many importers will want to restock as fast as possible, just in case there is a prolonged outage due to Hormuz blockade.”

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The diesel market was already under pressure before the Middle East crisis began. The fuel is used in cars and across industries.

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US stockpiles have been at seasonal lows while in Europe, refinery outages have squeezed supply. Add to that a potential curtailment of the Strait of Hormuz, through which ships carried about 850,000 barrels a day of the fuel last year, according to Vortexa data compiled by Bloomberg News. In past times of conflict, Iran has threatened to shut the waterway.

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Since Israel’s attacks began on June 13, there’s been a race to shut down futures positions. More than 100,000 gasoil contracts have been closed out, the most for any four trading sessions since 2021. 

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The price moves in ICE Gasoil futures — Europe’s benchmark diesel contract — suggest traders’ supply fears aren’t just about the present.

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Diesel for July delivery now costs $21.25 a ton more than August, a structure known as backwardation that typically signals market tightness. Meanwhile, further down the curve, diesel for delivery this December is trading at $45.25 a ton more than for a year later. The same premium was 50 cents on June 9.

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The surge is also making some options wagers on the structure of the diesel futures curve profitable. More than 7,000 contracts that would profit from a higher August-September spread would pay off if they expired today, when they wouldn’t have a week ago.

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—With assistance from Prejula Prem.

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