A quiet storm is brewing in the energy markets, and diesel is right in the middle of it.
According to Bloomberg, European sanctions are tightening the noose around Russian refined fuels and global diesel stocks appear to grow ever more threadbare; oil prices are up slightly, putting energy ETFs back in focus.
But while crude bulls may be celebrating, some market observers are asking: how much longer can this rally possibly persist?
Diesel Tightness Sparks A Fire Under Crude
West Texas Intermediate (WTI) crude touched $68 a barrel after the European Union agreed to a tighter price cap on Russian crude and imposed fresh sanctions on Russian petroleum products. The new package features the prohibition of a large Indian refinery, an unprecedented step that will potentially stifle a major pipeline of refined fuels to Europe.
Diesel markets are already flashing red. The differential between the front two months of New York heating oil futures, a proxy for diesel, has jumped to $3.53 a gallon from $2.99 just days ago, reported Bloomberg. In trader parlance, that’s an indicator of acute supply tightness.
Energy ETFs Catch The Upside—For Now
All can work into a windfall for energy-themed ETFs. Such funds as the United States Diesel Heating Oil Fund (NYSE:UHN), which invests in heating oil futures, may witness renewed investor demand during the diesel shortage. More general energy plays are also getting a bid:
SPDR S&P Oil & Gas Exploration & Production ETF (NYSE:XOP) ticked up on Friday enjoying the surge in crude prices, and exploration and production companies are set to gain from the tighter market.
And although not strictly an energy play, the iShares U.S. Oil & Gas Refining & Marketing ETF (NYSE:CRAK) might be one to watch as European demand shifts more towards U.S. refiners in the aftermath of India-specific sanctions.
Backwardation Suggests Tightness, But It Likely Won’t Last
Crude futures continue to trade in backwardation, a market structure in which near-dated contracts are pricier than back-dated contracts. That typically indicates tight supplies and robust demand, but with a caveat: backwardation won’t go on indefinitely.
There’s also a geographical aspect to consider. Wall Street institutions such as Morgan Stanley and Goldman Sachs note that global crude inventories have been increasing, but mainly in areas that don’t significantly affect pricing, Bloomberg reported. That is, there is oil out there, but not in a location that could tip the balance.
The Bigger Picture: Geopolitics, OPEC+ And Consumer Sentiment
Fueling the rally further are recent indications that the U.S. economy is showing resilience. Positive consumer sentiment numbers injected a glimmer of optimism into world markets, bolstering the thesis that oil consumption might not weaken even if central banks remain hawkish.
Meanwhile, OPEC+ has been reversing its production cuts more quickly than anticipated, but so far, that hasn’t been enough to cap prices.
Investor Takeaway: Ride The Diesel Wave, But Watch The Exit
At least for now, the squeeze fueled by diesel is making for a sweet spot in energy ETFs. But the trade is wound up tight—and susceptible to any hint of demand cooling, inventory shocks, or geopolitical whiplash.
If you’re riding the rally through ETFs, have one eye on refinery flows, another on Middle East production headlines, and perhaps a third on your way out.
Because, just like diesel itself, this surge will burn hot, but probably not forever.
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