Diesel premiums are starting to flash red
XLE•Diesel premiums signal tighter refined-product markets
Renewed missile strikes in the Middle East have pushed Brent crude futures to their highest in over five weeks, but prices remain a fair way below their wartime peak. Instead it is the move in refined products that is starting to worry some in markets.
Diesel cargoes from the Amsterdam-Rotterdam-Antwerp hub settled on Thursday at a near $80 premium to dated Brent, according to Morgan Stanley, the highest since at least 1998 based on Argus records.
"For now, there isn't enough refining capacity running to turn the available crude into product - which keeps a lid on crude, and at the same time leaves product markets scrambling," write Morgan Stanley commodity strategists in a note.
Higher diesel costs may feed inflation and weigh on equities
The higher cost of refined products can feed inflation. Elevated diesel prices raise shipping costs, trucking rates, manufacturing costs and food production costs.
Higher prices may also force businesses and consumers to curb demand. This is part of the reason why TS Lombard said they were turning neutral on equities in a note out on Friday.
"The situation has clearly become more dicey compared with the pre-MoU situation, owing to the surge in crack spreads and the dwindling of global inventories," TS Lombard said.
"With the energy crisis rekindling, the backdrop for global equities has become less compelling."
Other factors adding to the caution include a shaky global growth backdrop, possible Fed tightening and upside risks to the dollar.
"With global equity valuations still rich and EPS growth expectations extremely elevated for the ACWI index we think a reduction in risk appetite is appropriate," TS Lombard said.
