Interest rate cuts "add fuel to the fire" for diesel market, is the upward trend difficult to extinguish this autumn?

According to the Zhitong Finance APP, analysts say that if the Federal Reserve lowers interest rates this month, it will boost industrial activity powered by diesel, the "main fuel," and the summer rise in diesel prices may continue into the fall.

After Federal Reserve Chairman Jerome Powell signaled a willingness to cut rates last month, fund managers' bullish sentiment on diesel reached its highest level in four weeks. This phenomenon highlights the increasing importance of diesel as the "preferred asset" for investors focusing on macroeconomic trends, as it is seen as a bet on the direction of the economy. Since early May, diesel prices have risen by about 20% due to global supply shortages and refinery shutdowns, outpacing the increases in crude oil and gasoline, while also attracting a new batch of speculators.

"The sensitivity of diesel prices to monetary policy has significantly increased compared to the past two or three years," noted Samantha Hartke, head of Americas market analysis at Vortexa, "partly due to the influx of new investors."

According to the CME FedWatch Tool, investors currently expect a 92% probability that the Federal Reserve will cut rates by 25 basis points next month.

In contrast, speculators' bullish positions on U.S. crude oil futures are at their lowest level in nearly 20 years, indicating that the correlation between interest rate expectations and crude oil and other fuel prices is gradually weakening. Recently, trading volumes in the crude oil paper market have been sluggish, as traders have chosen to remain inactive during the summer, waiting for the supply surplus triggered by OPEC+'s production recovery plans to materialize.

Conversely, data from Bridgeton Research Group shows that commodity trading advisors (CTAs), which often amplify market trends, have also increased their bullish stance on diesel: as of Monday, their long positions in diesel accounted for 55%, compared to just 18% on August 20.

Joe DeLaura, global energy strategist at Rabobank, stated, "A rate cut will provide stronger support for basic industries and capital-intensive sectors, which are major consumers of diesel. This means that, in the current environment of low inventories, diesel demand will further increase."

The rise in diesel prices may also be compounded by seasonal factors such as the harvest season and winter, leading to increased fuel costs for agricultural machinery users and home heating users.

However, warm winter weather or faster-than-expected inventory accumulation could slow down or even halt the surge in diesel prices. Additionally, there is a self-limiting factor to this rise: excessively high freight costs may begin to suppress industrial activity.

Energy market economist Philip Verleger pointed out that this "pain point" (the critical point at which high freight costs suppress industrial activity) could occur when diesel prices reach $10 per gallon. Currently, the national average price of diesel in the U.S. is slightly below $4 per gallon, indicating that there is still some room for diesel prices to rise Hartke from Vortexa stated that "the impact of rising diesel prices is much greater compared to gasoline—because it's no longer just a matter of consumers reducing unnecessary driving, but the entire industry could potentially contract as a result. However, we have not yet reached that point."