Analysis: U.S. Refiners Bet on Diesel's Relative Strength


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- U.S. refining margins soared to multi-year highs last month, 
driven by the strength in middle distillates. Low inventories and a global 
refining rut have provided price support to the middle of the barrel in the 
second half of the year. In October, a new sanctions announcement kick-started 
a rally in diesel futures, with NYMEX-traded ULSD futures peaking at a 
five-month high in mid-November.

   Diesel futures on both sides of the Atlantic have been much more resilient 
to slowing demand growth than gasoline prices. Middle distillate supply, 
already limited by sanctions and import embargos, further tightened in the 
second half of the year as global refinery outages soared. U.S. inventories of 
distillate fuel oil consequently remained far below historical norms throughout 
the year.

   Continental Europe, cut off from one of its main diesel supply streams since 
the European Union imposed an import embargo on Russian refined fuels in 
February 2023, has similarly experienced low inventory levels. Shrinking 
refining capacity and higher prices for alternatives to Russian fuels further 
kept a ceiling on inventories.

   Gasoline Narrative In the Opposite

   The lighter side of the barrel, in contrast, experienced no supply woes of 
this magnitude and offers a bearish narrative for gasoline, both in the U.S. 
and Europe.

   Because the average density of crude oil running through U.S. refineries is 
getting lighter each year, it is yielding more top-of-the-barrel product like 
gasoline versus medium-and-heavy derivatives that include diesel.

   While much of the U.S. runs on gasoline, Europe's fleet has a mixed 
dependency that requires relatively more diesel. To meet its diesel demand, 
Europe is also producing more gasoline than it needs, as a by-product of 
getting to that diesel. The excess European gasoline used to be exported, 
mostly to West Africa. But since last year, the 650,000-bpd Dangote refinery in 
Nigeria has been producing a substantial part of fuels needed by West Africa, 
weaning the region off imports and forcing Europe to find other markets for its 
excess gasoline.

   In the U.S., gasoline inventories have stayed within historical bounds -- in 
contrast to distillate fuel oil stocks -- pressuring RBOB futures to trade 
below year-ago levels for most of 2025.

   Demand developments, meanwhile, were also less supportive of gasoline than 
middle-of-the-barrel product. Auto fleet rejuvenation, engine efficiency gains 
and the growing share of electric vehicles have cut into petroleum fuel demand, 
particularly for gasoline.

   Diesel Strength vs Gasoline to Continue

   While U.S. vehicle miles traveled surpassed the pre-COVID peak for the first 
time this year, the U.S. Energy Information Administration observed no 
commensurate growth in gasoline supplied to the domestic market -- a proxy 
measure for consumer demand.

   The relative strength of diesel vis-a-vis gasoline is likely to persist, as 
is the growing divergence between refined product and crude oil prices. The EIA 
in its latest short-term energy forecast expects crack spreads to remain above 
the already high levels observed this year, driven by diesel, fuel oil and jet 
fuel. While diesel and gasoline inventories alike are forecast to stay low by 
historical standards, the agency's price development forecasts still differ by 
fuel type.

   EIA expects wholesale gasoline prices to average $1.85 gallon in the first 
quarter of 2026, down 8.4% quarter-on-quarter and 15.9% year-on-year. Wholesale 
diesel, meanwhile, is forecast to average $2.17 gallon, down 7.6% 
quarter-on-quarter and 9.6% year-on-year.

   Planned refinery closures on both sides of the Atlantic and a looming EU 
import embargo for refined products made from Russian crude oil should continue 
to provide support to product prices, favoring the middle of the barrel. Given 
ample crude oil supply and limited spare refining capacity, the divergence 
between oil and product prices is also set to continue well into 2026.

    

    




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