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Sanctions on Russia have created high volatility affecting the Diesel Market

In: Finance

Diesel market in Europe went into a frenzy on Wednesday, with a key price signal soaring to unprecedented heights before rapidly plunging. During the early hours, traders were paying almost $300 a ton (the equivalent to $40 a barrel) more for this month’s supply than next on the ICE Futures Europe exchange. The spread then collapsed, but remains at what would be considered an unmatched level at any other time in history.

Diesel’s near-term market structure has become acutely bullish following Russia’s invasion of Ukraine, indicating concerns about supplies. Futures markets can be volatile just ahead of a contract’s expiration (Thursday for March diesel) but the current price swings are extreme. The spread between April and May, is also wildly volatile, perhaps a better indicator of market sentiment because of this month’s contract’s imminent expiry.

The U.K. has announced plans to ban oil imports from Russia, including diesel. Shell Plc said it will have to cut fuel production at some of its refineries as it switches away from Russian oil. Supply concerns come as governments pile up sanctions to isolate Moscow and companies shun Russian oil.

The European diesel Market is structured as backwardation, this is due to how expensive prompt contracts are versus contracts made at a later date. Brent crude, the global benchmark, is also backwardated, but nowhere close to what is happening in diesel. The Diesel ton expanded in price up to $294.75 before drawing down again. By 12 p.m. London, it was trading at $100.

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