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Everyone is worried about gas prices, but diesel is driving inflation more than you think

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The prices for gas and diesel fuel, over $6.00 a gallon, are displayed at a petrol station in Los Angeles, March 2, 2022.

Frederic J. Brown | AFP | Getty Images

Even before Russia invaded Ukraine, the fuel that runs the global economy was in short supply.

Now some analysts say there could be spot shortages of diesel fuel and prices may stay elevated, even if oil and gasoline decline.

Those higher diesel fuel prices are also stoking inflation.

“I’ve started to use the term diesel ‘crisis.’ It clearly is a crisis that’s happening before our eyes. I wouldn’t rule out lines, shortages or $6 [price] in places beyond California,” said Tom Kloza, head of global energy research at OPIS. “I wouldn’t say it’s a shortage yet. Europe, I think they’re headed for a shortage,”

A drop in demand if prices become too high could temper that outcome. The low supply of diesel fuel is the result of a loss of refining capacity worldwide, after Covid wreaked havoc on the oil industry.

Kloza said it is the middle of the barrel — diesel — that has been hit the hardest.

Since Russia invaded Ukraine in late February, the price of oil has traded much higher, with volatile swings. West Texas Intermediate crude futures were at about $107 per barrel Wednesday, after trading as high as $130.50 on worries about shortages due to sanctions on Russia.

Diesel price rises more than gasoline

“When you’re seeing crude rallying, you’ve seen diesel outpacing it just because of supply concerns. We’re already at eight-year lows for distillate inventories,” said Matt Smith, lead oil analyst Americas at Kpler.

“So what you’re really seeing is while everyone is focused on the crude side of things, prices have really been pushing on because Europe is short diesel and it has to import a lot of diesel, whereas it exports gasoline,” he added. “While there’s obviously concerns about the crude side of the picture, ultimately diesel is what the end-user needs.”

While gasoline prices at the pump have held steady over the past week, the price of diesel continued to rise, gaining about 8 cents per gallon to a national average of $5.12 per gallon, according to AAA. The national average for unleaded gasoline is $4.23 per gallon, up from $2.86 a year ago.

The price of diesel, however, was $2.03 per gallon cheaper at this time last year. For a truck that fuels up with 125 gallons or more, that several hundred dollars extra at every filling can result in higher costs for anyone who buys anything that gets shipped, from food to home goods to automobiles.

Contribution to inflation

“The spread between diesel and motor fuel is the widest it’s ever been in the data,” said Mark Zandi, chief economist at Moody’s Analytics. “It’s $1 a gallon.. the average over the last few decades has been 30 to 40 cents. That gives you a sense of how out of balance it is … By my calculation, one-tenth of the acceleration in inflation [over the past year] is due to the surge in diesel prices.”

That contribution to inflation includes related impacts.

“The farmer ploughing the field, getting the food to the store shelf: It’s the cost to FedEx and UPS getting the product we’re buying to the front porch — all of those ancillary knock-on effects,” Zandi said.

But for commodities from production to shipping, the contribution of diesel prices to inflation is even greater. Zandi calculates that 17% of the acceleration of commodity prices is due to the higher diesel costs.

“Diesel is used in farming. It’s used in a lot of industrial processes. All the machinery runs on diesel. A lot of construction runs on diesel,” said Francisco Blanch, global head of commodities and derivatives research at Bank of America. “I think it’s very problematic. Trucks run on diesel, trains run on diesel, and planes run on jet fuel which is also diesel.”

Since marine fuel rules changed in 2020, ships have switched to cleaner fuels, like marine gasoil, a type of diesel fuel. Heating oil is also diesel fuel, and diesel trades under the heating oil contract on the CME.

Blanch notes that before Russia invaded Ukraine, its crude exports totaled 5.5 million barrels a day, with just over half going to Europe. But Russia also exported 2.4 million barrels a day of refined products, including more than 1.1 million barrels a day of diesel exports. About half of the refined products also went to Europe. 

Russia has had a difficult time unloading any waterborne oil or refined products because buyers and transport companies are reluctant to run afoul of sanctions slapped on its financial system by the U.S. and allies. As a result, Europe’s diesel shortage has become a worldwide problem as shipments change course. 

“It does impact the backbone of everything we do, whether it’s moving things around the world or harvesting or producing anything in a factory. Almost every human activity has some element of diesel consumption,” Blanch said. “In Europe, half the cars run on diesel.” 

Zandi said higher diesel prices spark an inflation that is “corrosive to the economy’s ability to grow,”

“The world’s businesses run on diesel, and diesel is at record highs and as high as it’s ever been relative to motor fuel costs, and that’s bleeding into inflation in a meaningful way. That has negative consequences,” he said.

Refinery issues

Typically, analysts say diesel is cheaper than gasoline at this time of year. Some analysts say there could be just limited shortages of diesel.

“On the margin, we just have a very tight oil complex right now. Part of the reason is that the refining system and the supply of diesel fuel is so tight,” said Kurt Barrow, S&P Global Commodity Insights vice president of oil and downstream. “We had a significant number of refinery shutdowns because of the energy transition. combined with the Covid low demand period.”

Barrow said the global refining industry is down about 3.5 million barrels a day of refining capacity from pre-Covid levels, with about 1 million barrels a day of that in the U.S. and another 0.6 million barrels a day in Europe.

As the economy has reopened, diesel supplies were already tight.

“When you take 600,000 barrels a day of Russian exports out of a tight market, that’s what adds pressure,” Barrow said.

According to S&P Global, the U.S. consumed about 9.3 million barrels of gasoline per day in 2019 and another 4.1 million barrels of diesel fuel. For Europe, the mix was much different. Gasoline consumption was just 2.1 million barrels compared to 6.8 million barrels a day for diesel fuel.

The cure to high prices may already be showing up.

In the past week, diesel demand fell to 3.8 million barrels a day in the U.S. from 4.5 million the week earlier, according to the Energy Information Administration.

“It’s a big drop in diesel fuel demand,” said John Kilduff, partner with Again Capital. “Five and six bucks will do that.”

While the national average is $5.12 per gallon, prices at the pump in California are an average $6.44, according to AAA. In New York, diesel is an average $5.34 per gallon; $5.17 per gallon in Florida and $4.86 per gallon in Texas.

Kilduff said there may be more relief on the horizon.

U.S. refiners have increased their operating rate to 92%, much higher than last year, he said. Some refineries can also change the mix of fuels they produce, and could increase diesel production.

But there are more complicated issues impacting refining.

The Covid lockdowns in 2020 resulted in a sharp drop in oil and fuel demand, and have made for imbalances as the refinery industry first responded to sudden shutdowns and then ramped up as demand grew. Not all refineries have come back online, and two in the U.S. are in the process of transitioning to become biofuel facilities.

“This is a ‘gap year’ for worldwide refiners,” Kloza noted. “North America has seen the closure of about 1.2 million barrels a day of refining since just before Covid.”

Refineries in California, North Dakota, Wyoming and Newfoundland are among those that have been or are in the process of being repurposed to make renewable diesel and sustainable aviation fuels, he added.

Kloza said there will be some relief next year when huge new refineries come on line in the Middle East, Southeast Asia and West Africa. Those refineries are designed to maximize yields of fuels including diesel and jet fuel, he added.

The amount of diesel in storage in the U.S. is at an unusually low level

“Diesel stocks have declined for the past year a half and are down by nearly 70 million barrels, to the lowest level since 2014,” Kilduff said. “There’s just 112 million barrels of diesel fuel in storage, compared to 141 million a year earlier.”

Inventories are 20% below the pre-pandemic five year average, Kilduff added.

“Right now the shortage is in diesel, and reserves are down to the ground,” Blanch said. “And that could move to gasoline because everyone is going to be maximizing diesel runs.”



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IMF hikes global growth forecast as inflation cools

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The IMF has revised its global economic outlook upwards.

Norberto Duarte | Afp | Getty Images

The International Monetary Fund on Monday revised upward its global growth projections for the year, but warned that higher interest rates and Russia’s invasion of Ukraine would likely still weigh on activity.

In its latest economic update, the institution said the global economy will grow 2.9% this year — which represents a 0.2 percentage point improvement from its previous forecast in October. However, it said that number would still mean a fall from an expansion of 3.4% in 2022.

It also revised its projection for 2024 down to 3.1%.

“Growth will remain weak by historical standards, as the fight against inflation and Russia’s war in Ukraine weigh on activity,” Pierre-Olivier Gourinchas, director of the research department at the IMF, said in a blog post.

The Fund turned more positive on the global economy due to better-than-expected domestic factors in several countries, such as the United States.

“Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe,” Gourinchas said, also noting that inflationary pressures have come down.

Global outlook is better but don't get too optimistic, IMF chief warns at Davos

In addition, China announced the reopening of its economy after strict Covid-19 lockdowns, which is expected to contribute to higher global growth. A weaker U.S. dollar has also brightened the prospects for emerging countries that hold debt in foreign currency.

However, the picture isn’t totally positive. IMF Managing Director Kristalina Georgieva warned earlier this month that the economy was not as bad as some feared, “but less bad doesn’t quite yet mean good.”

“We have to be cautious,” she said during a CNBC-moderated panel at the World Economic Forum in Davos, Switzerland.

The IMF on Monday warned of several factors that could deteriorate the outlook in the coming months. These included the fact that China’s Covid reopening could stall; inflation could remain high; Russia’s invasion of Ukraine could shake energy and food costs even further; and markets could turn sour on worse-than-expected inflation prints.

IMF calculations say that about 84% of nations will face lower headline inflation this year compared to 2022, but they still forecast an annual average rate of 6.6% in 2023 and of 4.3% in 2024.

As such, the Washington, D.C.-based institution said one of the main policy priorities is that central banks keep addressing the surge in consumer prices.

“Clear central bank communication and appropriate reactions to shifts in the data will help keep inflation expectations anchored and lessen wage and price pressures,” the IMF said in its latest report.

“Central banks’ balance sheets will need to be unwound carefully, amid market liquidity risks,” it added.



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Credit Suisse see Apple beating the Street this week for a few reasons

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Most Adani shares continue losses; founder loses $28 billion in month

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Gautam Adani, chairperson of Indian conglomerate Adani Group, at the World Congress of Accountants in Mumbai on Nov. 19, 2022. Founder Gautam Adani, the richest man in Asia and once second only to Elon Musk, fell out of the world’s top five richest to rank seventh on the Bloomberg’s Billionaire Index.

Indranil Mukherjee | Afp | Getty Images

Shares of most of Adani Group companies continued to see sharp losses for a third consecutive trading session as the company attempted to rebut short seller firm Hindenburg’s report, which accused the conglomerate of stock manipulation and an “accounting fraud scheme.”

Adani Enterprises erased earlier gains of up to 10% and last traded flat in Mumbai’s afternoon trade after the group published a lengthy response of over 400 pages to Hindenburg’s report over the weekend, saying that it will exercise its rights to “pursue remedies” to protect its investors “before all appropriate authorities.”

Adani Enterprises’ stock price remains more than 25% lower in the month to date, Refinitiv data showed. It proceeded with a secondary share sale worth $2.5 billion, which were overshadowed by a rout that wiped out a total of $48 billion as of last week’s close.

Founder Gautam Adani, the richest man in Asia and once second only to Elon Musk, fell out of the world’s top five richest to seventh place on the Bloomberg’s Billionaire Index.

His net worth fell $27.9 billion year to date, the index showed. It peaked at $150 billion on Sept. 20, 2022, before falling to to $92.7 billion as of last week’s close, according to the index.

Despite small gains seen in Adani Enterprises, other affiliates of the Adani Group continued to plunge.

‘Attack on India’

Adani Group said Hindenburg’s allegations were a “calculated attack on India, independence, integrity and quality of Indian institutions, and growth story and ambition of India,” in the response it released over the weekend.

The group’s chief financial officer Jugeshinder Singh said in an interview with CNBC-TV18, an affiliate of CNBC, that the value of Adani Enterprises has not changed “simply because” of share price volatility, adding it instead lies in its “ability to incubate new businesses.”

He added that he is confident Adani Enterprises‘ follow-on public offering will be fully subscribed, calling Hindenburg’s report “simply a lie” and the timing of the report “malicious.”

Hindenburg on Monday morning described the group’s response “bloated” and claimed it “ignores every key allegation” against the conglomerate that it raised.

“Fraud cannot be obfuscated by nationalism of a bloated response that ignores every key allegation we raised,” the short seller titled its response to Adani Group.



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