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Charlotte Blum: analysis editor, Argus Media
Published:  08 October, 2018

Oil prices continue on their upward trajectory, and there are signs of tightness in global markets, felt all the way down the supply chain to the UK pump.

Brent crude prices topped $82/bl in late September, closing the month at $82.72/bl, $5.30/bl up on the month. Prices at UK retail stations edged up further and remained almost as far apart as in July and August. Diesel continues to command a premium of over £0.03/l to petrol, largely reflecting strong global diesel demand.

Continued growth in diesel demand lifted prompt prices above forward on the Ice gasoil futures exchange, for the first time since June. Diesel volumes arriving in ARA fell slightly, mostly because more cargoes from the Mideast Gulf are being diverted to Asia-Pacific; and US shipments to Europe dropped in late September as a result of US refinery maintenance. Still, diesel has been accumulating in ARA as the market has been waiting for the river Rhine, which has been unusually low, to finally go back to normal and allow unrestricted shipping to resume. This should open the way to increased flows to Germany, where a refinery explosion sent buyers scrambling for supplies by truck in neighbouring countries. Higher stocks have helped put a lid on ARA prices and slightly compressed still strong ARA refining margins for diesel.

Diesel crack spreads, at over $13.80/bl at the end of September, may be some $1.50/bl lower than a month earlier, but gasoline margins have fallen far more, to just $6/bl from $10/bl. The end of the US summer driving season has reduced demand, and refiners continue to over-produce gasoline as they maximise their diesel output.

Meanwhile, underlying crude prices continue to rise, and a widening contango, where front-month Brent futures command a premium to forward, underscores strong demand outstripping supply (see graph). Anticipation of US sanctions on Iran has a significant effect on Iranian exports already, and Opec is being slow in relaxing its zealous compliance with agreed output cuts. Opec's large producers appear unwilling to see prices drop, and retail buyers in the UK will continue to feel the pain.