European diesel is in a hurry! Cracking spreads have soared to record highs, and Damo warns that the shortage will further deepen

The Zhitong Finance App learned that Morgan Stanley pointed out that due to the combined effects of multiple major supply challenges, Europe is mired in a tight diesel supply situation. Regional refining profit margins have set a new historical record, and inventory levels continue to decline.

“The current supply situation is really tight,” analysts including Martijn Rats said in a July 19 report. “Our supply and demand model shows that European diesel inventories may fall to their lowest level for many years before the end of the year.”

This month, the US-Iran conflict once again escalated, impacting the global energy market, and the increase in the price of refined oil products far exceeds that of crude oil. As a key fuel supporting truck transportation, agriculture and industrial operations, the diesel market continues to tighten due to multiple factors, including the blockage of traffic in the Strait of Hormuz, Ukraine's attack on Russian refineries, and a ban on diesel exports imposed by Russia.

Analysts pointed out, “The real bottleneck in the current petroleum system is the refining process, not the crude oil itself.” They mentioned that some African crude oil shipments have yet to be sold, and some regions in the market are also showing a bearish long-term dividend structure. “The focus of all of this is on the diesel market, and Europe is the hardest hit area.”

According to its observations, diesel refining profits — or cracking price spreads — in northwest Europe have soared to record levels. Local inventories are expected to continue to decline from August to a low of around 299 million barrels by November, which will be the lowest level in the same period since 2015.

Furthermore, the reduction in processing volume at Chinese refineries far away in Asia has also exacerbated the tight global supply situation. Analysts said, “China never directly supplies diesel to Europe,” but when “the operating rate of Chinese refineries falls, the total amount of refined oil products that can be transported west in the global system naturally decreases.”

However, Morgan Stanley also warned that the current tight market situation is fully reflected in prices, and investors are advised not to keep up with the current level. They said the market was “fully priced — not to chase”.