Diesel trumps gasoline as traders bet on big spread

New York: 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 tonne, or 14 per cent, 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 per cent of the world's gasoline is consumed in the US, and with high prices and a soft economy, that market is stalling."

Diesel use in developed economies is growing about two per cent this year, or 200,000 barrels a day, while gasoline use in the US falls for the first time since 1991, according to Merrill Lynch & Co. The trend will continue, boosting diesel's premium to gasoline by 31 per cent, to more than $190 a tonne 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 per cent more than the world average.

Saras SpA, owner of the Mediterranean region's biggest refinery, Italy's ERG SpA and Greece's Motor Oil Hellas SA also have plants with units designed to maximise diesel supply.

"ERG, Saras and Motor Oil's bias toward diesel production versus gasoline positions them well to exploit the global shortages of diesel and upgrading capacity," Merrill Lynch analyst James Schofield said.

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

Constraints

Most US refiners can't maximise 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.

US 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 Organisation of Petroleum Exporting Countries (Opec).