Middle East Distillate Export Exposure
Middle distillates make up about one third of Middle East oil product exports. IEA data shows 730,000 barrels per day were gasoil/diesel and 380,000 barrels per day were jet fuel last year, with the rest mainly gasoline and fuel oil. Replacing these supplies is expected to be hard due to competing shortages elsewhere. Asian OECD countries also need up to 240,000 barrels per day of diesel/gasoil, and exporters in Asian non-OECD states may cut shipments, while China may stop exports. Updated forecasts put diesel at USD 1,100 per ton by mid-year and USD 850 per ton by year-end. Jet fuel is forecast at USD 1,250 per ton by mid-year and USD 950 per ton by year-end. Given the ongoing war and the closure of the Strait of Hormuz, we are seeing a historic squeeze in energy markets. With roughly 20% of the world’s daily oil supply now choked off, the 57% surge in Brent this month is just the beginning of the story. The real stress is in refined products, where the supply gap from the Middle East is creating an unprecedented opportunity.Trading And Hedging Implications
Derivative traders should focus on the widening crack spreads, particularly for diesel and jet fuel. We are seeing diesel cracks approach $80 per barrel, a level that dwarfs the spikes seen during the 2022 European energy crisis following the disruption of Russian supplies. The most direct trade is to be long middle distillate futures, such as gasoil, while simultaneously being short crude oil futures to capture this extreme refining margin. The options market reflects this chaos with implied volatility at multi-year highs, making strategies that benefit from this a key consideration. Buying call options on ICE Gasoil futures is a straightforward way to position for prices hitting the forecasted $1,100 per ton by mid-year. This approach allows for participation in further explosive upside while capping potential losses to the premium paid. While the immediate trend is sharply upward, we must also prepare for an eventual resolution, which is anticipated for late spring. Any credible news of a ceasefire or a reopening of the strait will cause these inflated prices and spreads to collapse rapidly. Therefore, cautiously acquiring out-of-the-money puts on futures contracts for the late summer months could serve as a valuable hedge against a sudden peace deal. Create your live VT Markets account and start trading now.
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