Current Diesel Costs: Crucial Information for Investors to Consider
The shipping industry's anticipated increase in diesel demand, coupled with potential struggles for refineries to meet this demand, could lead to a surge in diesel prices. Here's how investors can mitigate these risks through diversification and strategic hedging.
Refineries are designed to process specific crude oil types, and may struggle to produce the full range of distillates in the quantities demanded by the market. This could become problematic, especially with changes in fuel types used in shipping, such as the shift towards marine diesel.
Industry observers expect the demand for diesel from the shipping industry to increase significantly, equating to 1.6 million barrels of oil per day in total. Shipowners have three options to comply with new emission limits: convert ships to run on liquefied natural gas (LNG), install a scrubber, or switch fuel type to marine diesel. Hapag-Lloyd will initially continue to operate most of its ships on diesel, while Maersk, the world's largest shipping company, has chosen to switch fuel type.
To manage the potential increase in diesel prices, investors can employ several strategies:
- Diversifying energy exposure: Balance risks from tight diesel refining margins driven by processing capacity shortages by investing in a mix of energy ETFs, midstream infrastructure companies, and commodity-linked assets.
- Using derivative instruments: Hedge against volatile diesel and crude oil price fluctuations by using futures and options. This can help lock in prices to protect portfolios from sudden spikes caused by supply-demand imbalances or geopolitical events.
- Investing in companies with robust export infrastructure and integrated refining operations: These companies can capitalize on pricing inefficiencies during tight supply conditions.
- Incorporating sustainable and alternative fuel solutions: Support carriers that adopt electric or alternative fuel fleets and engage in modal shifts like intermodal transport to reduce exposure to diesel price volatility driven by shipping demand.
- Enhancing supply chain resilience: Reduce dependency on global shipping routes vulnerable to fuel price spikes by sourcing regionally and forming strategic partnerships.
- Staying informed on geopolitical developments and regulatory changes: Keep track of developments that affect diesel supply, prices, and alternative fuel production incentives, such as U.S. Renewable Fuel Standard adjustments and related tax credits.
Investors should also be aware of currency risk when considering these investment options. It's also important to note that the quality of fossil fuel varies depending on its source. For instance, Iran produces "Medium Sour" crude oil, while Saudi Arabia and the US primarily produce "Light" quality crude oil.
As of the first quarter, Iran's oil exports averaged 1.2 million barrels per day. With US sanctions, Iran's oil production could drop to less than half of that, further intensifying the diesel supply-demand dynamics.
An Exchange-Traded Commodity (ETC) that tracks the price movement one-to-one could be a less risk-averse investment option, while a more speculative investment is a knock-out call on the diesel price, which leverages the price movement.
In summary, a combination of diversification, strategic hedging, and strategic investment in companies with robust infrastructure and integrated refining operations can help investors manage risks associated with rising diesel costs linked to oil export changes and shipping industry demand.
- To combat potential struggles in refineries producing the required amounts of diesel for the shipping industry, investors might consider diversifying their energy investments, including investing in a mix of energy ETFs, midstream infrastructure companies, and commodity-linked assets.
- As the shipping industry shifts towards marine diesel to comply with emission limits, investors can hedge against volatile diesel and crude oil price fluctuations by using futures and options, thereby protecting their portfolios from sudden spikes caused by supply-demand imbalances or geopolitical events.
