Why gasoil prices are soaring despite cheaper crude oil
News Summary
Gasoil prices have risen 7.5% this year, with its crack spread climbing above $30/barrel, the highest since February 2024. The International Energy Agency (IEA) has nearly quadrupled its gasoil demand growth forecast for the year, despite lowering its overall global oil demand outlook. The market faces tight supply due to Russian sanctions, production losses, and low middle distillate stocks. Although Brent crude oil is 14% cheaper, the gasoil contract price has increased, driven by surprisingly strong demand and supply constraints. Upcoming EU import bans on Russian oil-produced diesel and Ukrainian drone attacks on Russian refineries further compound market concerns. Commercial stocks of middle distillates in OECD countries are below the five-year average, exacerbating market nervousness as the Northern Hemisphere winter approaches, with the US showing a significant deficit in stock levels. Analysts anticipate the gasoil market will ease in 2026, with global demand growth expected to halve (primarily in OECD countries) and increased diesel production and exports from the US, India, China, and the Middle East, leading to a projected price fall to $600 per ton.
Background
Gasoil (diesel) is a middle distillate widely used in transportation, industry, agriculture, and heating. Its price typically correlates with crude oil, but refining capacity, seasonal demand, and geopolitical factors can cause it to diverge from crude prices. Historically, energy markets, especially refined products, are highly susceptible to geopolitical events such as the Russia-Ukraine conflict and the resulting sanctions. Since early 2022, Western countries have imposed a series of sanctions on Russia, aiming to curb its oil and gas export revenues. These sanctions have not only impacted crude oil supply but also had ripple effects on Russian refined product exports, leading to tight global supplies of specific products like gasoil. The International Energy Agency (IEA) regularly publishes global oil market reports, providing crucial forecasts for demand, supply, and inventories, serving as a key reference for industry analysis.
In-Depth AI Insights
What are the strategic implications for refiners as gasoil prices decouple from crude? The strength of refined product prices, particularly gasoil, relative to crude oil reflects structural inadequacies in global refining capacity and geopolitical distortions of product flows. For refining companies, this implies: - Margin Support: Soaring gasoil crack spreads provide significant margin support for refiners, especially when crude input costs are relatively lower. This could incentivize refiners to optimize production towards middle distillates to maximize short-term profits. - Investment Attractiveness: Sustained strong crack spreads may attract investment into refining capacity, particularly in regions like Asia and the Middle East, to meet future demand and fill supply gaps created by sanctions and production outages. - Operational Risks: However, over-reliance on high crack spreads also comes with geopolitical and demand volatility risks. Should sanctions ease or a global economic slowdown cause a sharp drop in demand, refiners could face margin erosion. How are geopolitical sanctions reshaping global energy trade and influencing the 'grey market'? Sanctions on Russian energy are profoundly reconfiguring global energy trade flows and fostering more complex 'grey market' activities: - Trade Route Reconfiguration: Russian crude and products are forced to find new buyers (e.g., India, China), leading to shifts in global shipping routes and logistics costs. This increases the complexity and opacity of transactions. - Emergence of Grey Markets: The article mentions that "new sales routes are likely to emerge to bypass sanctions," implying an increase in activities like transshipment through third countries, blending, or re-labeling origins to circumvent restrictions. This makes tracking actual supply volumes and origins more challenging, adding to market volatility and uncertainty. - Regulatory Challenges: For the Trump administration, effectively enforcing sanctions to achieve geopolitical objectives without causing excessive negative spillovers to the global energy market (e.g., spiraling global inflation) remains an ongoing challenge. The expansion of grey markets diminishes the efficacy of sanctions. Is the forecast for a gasoil market easing in 2026 overly optimistic, and what are the potential headwinds? While analysts predict an easing of the gasoil market in 2026, several key potential headwinds could render this forecast overly optimistic: - Prolonged Sanctions: Sanctions against Russia could persist longer than anticipated or even be expanded, continuously restricting supply. New sanctions or stricter enforcement of existing ones would further tighten the market, especially for refined products. - Geopolitical Escalation: Continued Ukrainian drone attacks on Russian refineries indicate that the conflict is not de-escalating, potentially leading to further supply disruptions and heightened market anxiety. Any escalation in military conflict could swiftly alter the supply-demand balance. - Global Economic Resilience: Despite the IEA's lowered overall oil demand forecast, if global economic growth, particularly in non-OECD emerging markets, outperforms expectations, gasoil demand could remain robust, offsetting some easing factors. - Refining Capacity Bottlenecks: Even with high crack spreads, building or expanding refining capacity takes time and faces challenges from environmental regulations and capital investment. In the short term, refiners may not be able to swiftly increase gasoil output sufficiently to fully meet demand.