Diesel Overtakes Gasoline as Traders Bet on Widest Spread Ever 

By Nesa Subrahmaniyan

June 9 (Bloomberg) — Diesel, the world’s most-used transport fuel, is so prized by traders they’ll pay the biggest premiums in at least 15 years to buy it.

Because refiners can’t make enough, diesel sells for $145 a ton, or 14 percent, more than gasoline as China halts exports, the Middle East boosts imports and power shortages force mines from Australia to Chile to run oil-fed generators. For the first time, refiners Valero Energy Corp. and ConocoPhillips this summer will make more money from diesel than gasoline in the Northern Hemisphere, said Andrew Reed, an analyst at Energy Security Analysis Inc. in Boston.

“Diesel is in the driver’s seat now, and will be at least in the next few years,” said Anthony Nunan, assistant general manager for risk management in Tokyo at Mitsubishi Corp., Japan’s largest trading company. “About 43 percent of the world’s gasoline is consumed in the U.S., and with high prices and a soft economy, that market is stalling.”

Diesel use in developed economies is growing about 2 percent this year, or 200,000 barrels a day, while gasoline use in the U.S. falls for the first time since 1991, according to Merrill Lynch & Co. The trend will continue, boosting diesel’s premium to gasoline by 31 percent, to more than $190 a ton in Europe by year-end, swap contracts from broker PVM Oil International show.

Refiners will profit by producing more diesel instead of gasoline, and the biggest winners will be those that process cheaper, heavy grades of crude. Reliance Industries Ltd. will start operating the world’s largest refinery on India’s west coast this year, with equipment designed to produce about 247,000 barrels a day of diesel from every 580,000 barrels a day of crude, 22 percent more than the world average.

Unable to Switch

The world consumed 30.2 million barrels of diesel and related distillate fuels, 16 percent more than the 26.1 million barrels of gasoline in 2006, according to statistics compiled by BP Plc.

Most U.S. refiners can’t maximize diesel production and cut back on gasoline because they lack the flexibility to switch from one product to another. That means when gasoline profits dropped and refiners cut output, they reduced diesel supplies too.

U.S. oil refiners for the past seven years focused on increasing gasoline production, adding the capacity to make another 1.2 million barrels a day, almost double the additional 700,000 barrels of diesel, according to the Organization of Petroleum Exporting Countries.

To be sure, some analysts say diesel’s gains have peaked. Higher prices will curtail demand, and capacity “should increase markedly” as refineries come back online after maintenance and new plants are added in China and India, Credit Suisse said in a report last week.

Australian Demand

“Diesel prices may decline over the second half of this year,” said Jit Yang Lim, a Singapore-based senior consultant at FACTS Global Energy, who also said diesel’s best is past. “Part of the reason is that in the second half we have new refining capacity coming, particularly Reliance in India.”

Last week a fire shut down shipments from Apache Corp.’s Varanus Island natural gas plant off Australia, boosting demand for diesel from the region’s mining companies. Apache said it may take two months to restore production.

Even before the fire, the diesel supply crunch prompted Goldman Sachs Group Inc. analysts led by London-based Henry Morris to increase estimates of refinery profits in Europe to $8.20 a barrel from $6.95 for 2008, and for 2009 to $8 from $7.50.

“In Western Europe, diesel is all the time gaining market share compared to gasoline,” Jeroen van der Veer, chief executive of Royal Dutch Shell Plc, Europe’s largest oil company, said in Kuala Lumpur. “We expect those trends will continue.”

Growing Demand

European demand for diesel is growing at an annual rate of 4.4 percent, Energy Security Analysis’ Reed said. Carmakers Volkswagen AG and Bayerische Motoren Werke AG are making more diesel-engine cars, cutting demand for gasoline, while Shell, Total SA and BP Plc’s plants can’t make enough of the fuel.

Stricter emission standards for diesel in the U.S. and Europe are also helping to push up diesel, Reed said. The European Union starting in 2009 requires sulfur content in diesel to be lowered by 80 percent, to 10 parts per million, he said.

Diesel for prompt delivery in New York gained 32 percent this year, the result of increasing demand from trucks, trains and shipping companies, outpacing gasoline’s 20 percent advance. U.S. diesel consumption in March rose 3.3 percent from a year earlier to 3.5 million barrels a day, while gasoline use declined 1.5 percent to 9.1 million a day, according to the International Energy Agency in Paris.

Diesel has “gained a new lease of life,” said Tom O’Brien, a director of closely held Trafigura Pte in Singapore, the Asian unit of Trafigura Beheer BV, the world’s third-largest independent oil trading company. “Diesel has cleaned up its image as a dirty fuel by lowering its sulfur content in the developed world.”

To contact the reporter on this story: Nesa Subrahmaniyan in Singapore at[email protected]

Last Updated: June 8, 2008 20:59 EDT

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