Benchmark diesel price down again as futures markets turn up over OPEC+

Oil markets as a whole were broadly higher Monday as they absorbed the news that the OPEC+ group, which includes OPEC and some non-OPEC exporters led by Russia, plans on cutting its quotas by 1 million barrels a day when it meets later this week.

This would mark the first cut in output since it slashed production at the start of the pandemic, when a sudden glut was so enormous that the price of West Texas Intermediate crude, the U.S. benchmark, turned negative for a day. Since early 2021, OPEC has been scheduled to add production to the market every month, though an inability of several countries to do so has led actual output increases to often fall short of what was promised.

The meeting in Vienna will be the group’s first in-person gathering since early 2020.

In an interview with CNBC on Monday, Jeffrey Currie, head of commodities research at Goldman Sachs, said OPEC is “incentivized to [cut production] as they are the only producer in the world with spare capacity.” OPEC is looking at a market where global benchmark Brent crude has dropped from June levels near $120 a barrel down to more recent numbers near $85 a barrel before Monday’s rebound.  

“The old order is back and OPEC is probably more powerful than it’s ever been,” Currie told CNBC.

That news sent futures prices higher right out of the gate Sunday evening in the U.S. and early Monday morning in Asia. By the time trading was over, Brent had risen $3.72 per barrel to $88.86, an increase of 4.37%, while ultra low sulfur diesel on the CME commodity exchange climbed a slightly higher percentage, up 4.58% with an increase of 14.75 cents to $3.3691 per gallon. 

The cut of 1 million barrels per day in OPEC+ quotas is not expected to translate into a reduction in supply that high because few countries are producing their allotment anyway.

For example, in the latest survey of OPEC+ production by S&P Global Commodities Insight, which houses the legacy Platts business, only two out of 10 OPEC countries were producing their quota in August, the most recent month data is available. In the non-OPEC group, only the relatively tiny producer of South Sudan met its quota. There are three OPEC countries that have no quota for various political reasons: Iran, Libya and Venezuela. 

But that does not mean the production totals at OPEC+ weren’t trending upward in August. The group’s output of 42.84 million barrels a day that month was the highest since the start of the pandemic. 

Any cutback in crude supplies is going to mix with an already heavy reduction in refining, particularly in Europe. That has helped keep the Brent-to-diesel spread up near $1.25 a gallon, far higher than historical norms. 

In an article quoting consulting firm Energy Aspects, Reuters said about 1.5 million barrels per day of refining capacity in Europe will be offline in October for maintenance. That figure was 1.1 million in September and will improve to 600,000 in November. The figures were said to be higher than normal.

A decline in U.S. refining operations due to maintenance has started to show up in weekly statistics from the EIA. Refinery utilization in the week ended Sept. 23, the most recent data available, was 90.6%, representing the lowest figure since early May.   

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