Diesel’s summer rally may extend into the fall if the Fed cuts interest rates this month, bolstering industrial activity powered by the workhorse fuel, analysts say.
Money managers turned the most bullish on diesel in four weeks after Fed Chair Jerome Powell signaled openness to a rate cut last month, highlighting diesel’s growing status as a go-to bet on the economy for macro-focused investors. The fuel has gained about 20% since early May amid a global supply crunch and refinery outages, outpacing crude and gasoline and drawing interest from new segments of speculators.
“Diesel appears to be more sensitive to monetary policy this time around than in the last two to three years,” in part due to the influx of new investors, said Samantha Hartke, Americas head of market analysis at Vortexa.
Investors are now pricing in a 92% chance of a quarter-point rate cut next month, according to the CME FedWatch Tool.
At the same time, speculators are holding the least bullish position on U.S. crude futures in almost two decades, a sign of the fraying connection between interest rate expectations and prices for oil and other fuels. The paper market for crude oil has seen low volumes recently as traders sit on the sidelines for the summer and wait for a glut spurred by OPEC+ plans to revive production to materialize.
(Bloomberg)
By contrast, commodity trading advisers, which tend to exaggerate market trends, have also increased their bullish stance on diesel, sitting at 55% long on Sept. 1 versus 18% on Aug. 20, according to data from Bridgeton Research Group.
“A rate cut would be more supportive of base industrials and capital-intensive industries, which are heavy diesel users,” said Joe DeLaura, global energy strategist at Rabobank. “That means more diesel demand in a low-inventory environment.”
Diesel’s run threatens to collide with bullish seasonal factors, such as the harvest season and winter, making the fuel more expensive for those who use it to power farm equipment or heat their homes.
A warm winter or faster-than-anticipated inventory buildup may slow or halt diesel’s whirlwind ascent. The advance also has a self-limiting factor as inflated freight costs could start to curtail industrial activity.
That pain point is likely around $10 per gallon, according to Philip Verleger, an economist specializing in energy markets. The national average for a gallon of diesel is currently just under $4, meaning prices have some room to run.
Compared to gasoline, “diesel is a much larger hill to climb because you’re no longer talking about discretionary driving,” Vortexa’s Hartke said. “That’s entire industries pulling back. And we’re not there yet.”
