IOC Heads of Industry keynote on diesel futures

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Callum Macpherson Investec fuel derivatives expert talks fuel price to IOC

‘Diesel prices are very high on an historic basis due to...’

IOC were at the IoD on May 10th for a real round table – Opening keynote was delivered by Callum Macpherson; he is the Investec expert on fuel derivatives. Bullet summary and headlnes of the keynote below, it was wall to wall graphs on the giant screens as fellows were treated to a summary of the future value of diesel.

1. High crude oil prices in US Dollars

2. Weak pound (it was around 2 against the dollar when oil was at its all-time high in 2008)

3. Very high premium of diesel over crude oil

Diesel is one of the highest value products from that comes out of a barrel of crude like Brent and usually trades at a premium, but that premium has increased dramatically since the war in Ukraine started to disrupt diesel supply to Europe. Consumption around 25per cent of EU petroleum supply was from Russia including diesel, which Europe is structurally short of. The proposed EU embargo on Russian oil is potentially very significant, but only if it is done quickly and without many exemptions.

On the demand side, COVID-19 in China is the main concern. The PRC government remains committed to the zero tolerance approach and the lockdown in Shanghai continues. Beijing and other areas, seem to be taking a more localised approach though. But even in lock-downs, logistics have to continue and diesel demand tends to holds up.

Diesel in storage in Europe and the US is at historic lows, the market is tight.

What happens next? - The key issues for the market now are the planned European embargo on Russian crude and China’s approach to COVID lockdowns, are both essentially political issues, which makes then very hard to predict. If an EU oil embargo is agreed and implemented promptly, it could create a very challenging situation for the oil market – diesel in particular. Consumers can hedged their diesel price risk with swaps and as the market forward prices are below the current price, it is possible to lock in lower than current prices, through swaps