Not a permanent high

Diesel prices comment by Eugen Weinberg, Head of Commodity Analysis at Commerzbank

Eugen Weinberg
Eugen Weinberg [Photo: Commerzbank]

The diesel price has recently had an upward tendency with strong fluctuations. This was preceded by the renewed rise of the Brent oil price in combination with a strong US dollar (USD). This made oil, which is traded in USD, additionally “expensive” for European customers.

Reduction in output increases prices

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In addition, the OPEC producer countries have unexpectedly agreed on future voluntary production cutbacks. And this has caused oil prices to rise by more than ten percent. This is likely to have a negative effect on consumers, at least in the short term, as the production surplus of oil that was primarily responsible for the low oil prices is therefore likely to disappear for a while. However, the surge in oil prices is not likely to continue indefinitely, as this would require demand to grow considerably more. Furthermore, it is currently still debateable whether the OPEC countries will actually stick to the agreement, as in the past they have often “cheated”. Significant political differences and a difficult financial situation in many OPEC countries make strong solidarity and good cooperation rather unlikely.
Above all, the rise in prices should please the shale oil producing countries like the USA. Given the current high prices, they can hedge their future production against a decline in prices and expand it irrespective of any price capers in the months to come. Not to mention: Donald Trump has frequently made positive comments about shale oil and is likely to support it.

Outlook

Although we believe in higher prices for crude oil and fuels in the short term due to the OPEC agreement, we expect lower prices in the long term. The agreement made by OPEC countries in Vienna is expected to be counterproductive in the long term, as the non-OPEC countries will be able to increase their production and revenues, and gain market share. In addition, the recent oil and diesel price hike is driven by highly speculative elements. That makes it vulnerable to profit-taking and stronger downward fluctuations in the medium term.

Author: Eugen Weinberg

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