In a report sent to Rigzone late Tuesday, Standard Chartered Bank Energy Research Head Emily Ashford highlighted that West Texas Intermediate’s (WTI) discount to Brent continued to deepen and was sitting at over $12 per barrel, “its widest since early May”.
“The spread is not just the result of Brent acquiring more geopolitical premium, but also WTI-specific weakness,” Ashford noted in the report.
“There is explicit evidence that the market is pricing in the risk of a not-immaterial cut to U.S. refinery runs. This is being compounded by high freight rates preventing the usual Brent-WTI arbitrage from closing the spread,” Ashford added.
“Given the escalation in VLCC freight costs, WTI needs a steeper discount to Brent to compensate for these costs. If Washington were to step decisively away from the risk of export restrictions, we could see WTI’s discount narrow rapidly,” Ashford continued.
In the report, Ashford went on to note that diesel has moved from a market problem to a policy problem.
“The next few weeks could clarify how far Washington is prepared to intervene in U.S. product markets as the U.S. midterm elections approach,” Ashford said.
“There is strong incentive for Washington to contain the Middle East conflict given the impact of high gasoline and diesel prices on consumers,” the Energy Research Head noted.
“Significant internal pressure for a U.S. diesel export ban remains, particularly from those battleground states where high diesel prices are meeting the key agricultural harvest season, such as Iowa,” Ashford pointed out.
Ashford highlighted in the report that U.S. President Donald Trump has backed restrictions on diesel exports previously, but noted that “many in his cabinet, including energy secretary Chris Wright, have warned that this could ultimately also tighten both gasoline and jet fuel supply”.
“This would make both the global product problem worse and, after temporarily helping U.S. consumers, would damage Gulf Coast refining economics, potentially lowering crude runs,” Ashford warned.
“Pressure to demonstrate action on domestic prices is leading the administration to consider less disruptive alternatives, including voluntary export reductions by refiners and broader use of tax-exempt dyed diesel,” Ashford said.
In a market analysis sent to Rigzone on Wednesday morning, Naeem Aslam, CIO at Zaye Capital Markets, outlined that the WTI-Brent gap stood at just over $14.
“At Zaye Capital Markets, we see oil caught between renewed geopolitical risk and evidence that physical supply is gradually improving,” Aslam noted in the analysis.
“President Trump’s rejection of suggestions that sanctions on Iran could be eased has reduced expectations for a quick diplomatic breakthrough, helping keep a geopolitical premium in Brent,” he added.
“At the same time, recovering crude flows from the region, including increased use of alternative export routes, are preventing the market from fully pricing a prolonged supply shock,” he continued.
“This explains why oil can rally sharply on political headlines and then retreat when traders see signs that barrels are still reaching the market,” Aslam went on to state.
In a market update sent to Rigzone late Tuesday, Rystad Energy Chief Economist Claudio Galimberti highlighted that the U.S. diesel export ban discussion is “the most consequential near-term policy question for energy markets”.
“A formal ban would push diesel prices sharply higher in Europe and Latin America, which are already running low on product stocks, while domestic U.S. gasoline and jet fuel prices would rise over time as U.S. Gulf Coast refiners would be forced to reduce their runs before long,” he added.
In a statement sent to Rigzone recently, American Fuel & Petrochemical Manufacturers (AFPM) announced that more than 30 U.S. business, energy, and manufacturing groups from around the country had issued a letter to Trump “urging him to reject calls to ban or limit the export of diesel and other fuels from the United States”.
The letter – which accompanied the statement and was signed by groups including the AFPM, the American Exploration & Production Council (AEPC), the American Petroleum Institute (API), the Independent Petroleum Association of America (IPAA), the Texas Oil & Gas Association (TXOGA), the International Liquid Terminals Association (LTA), and the Liquid Energy Pipeline Association (LEPA) – thanked Trump for his “continuing commitment to an unsurpassed U.S. energy industry” but urged him “to reject calls to ban or otherwise limit the exports of diesel and other products that have made the U.S. energy industry so strong”.
Rigzone previously contacted the White House for comment on the AFPM statement and letter. The White House did not respond to Rigzone.
To contact the author, email
