Diesel not crude the best geopolitical hedge, Goldman say
XLE•Why Goldman prefers diesel
In their Thursday note, they have four reasons, mostly focused on diesel, rather than gas.
- Diesel and refining were structurally far tighter than crude before the Iran war, as long-run demand uncertainty discouraged investment and encouraged refinery closures.
- Mideast and Russia supply shocks hit diesel harder than crude, as refineries are large, above-ground, high-value targets, making direct physical damage more likely than at more dispersed oil fields. Mideast pipeline capacity is also much larger for crude than for oil products.
- Fourth-quarter seasonality should tighten diesel balances further, unlike in crude. Demand for diesel typically increases in Q4, while crude demand normally declines.
- China policy is more likely to cap crude price upside than the upside potential for diesel.
(Alun John)
Goldman says diesel and European gas are better hedges than crude
Even six months into the war in the Gulf, markets are still responsive to headlines about the status of peace talks. Goldman say for investors looking to hedge against a reescalation the best hedge is diesel and European gas rather than crude oil.
They say, in a Thursday note, should Middle East energy exports normalize only gradually through 2027 they estimate potential price upside of around 70% for both European diesel futures LGOZ6, LGOM7 and European natural gas TTF. TFMBMc1
In contrast, they see just a 35% increase for Brent crude.
