What Is the Outlook for Diesel and Gasoline Supplies?

Chris Hussey: This is The Markets. I'm Chris Hussey, and today is Wednesday, August 26th, and we're here on the Goldman Sachs trading floor with Nitin Jindal, who heads up our global commodities business within global banking and markets. Nitin, thanks so much for joining us on The Markets. 

Nitin Jindal: It's a pleasure. Thank you. 

Chris Hussey: Okay. I want to start with a breaking point question because we're about to celebrate, celebrate is not the right word, the sixth straight month of the Strait of Hormuz being closed. Has it surprised you that this has not disrupted the commodity markets more, or do you think we really are at a breaking point?

Nitin Jindal: Several things have surprised me, right? First, just the length of the war. That's surprising. But it shouldn't be surprising given what is happening in Europe, where we have-- we are at a four-and-a-half-year point, and nobody would have ever predicted at any point that that conflict would go this long.

The other thing which is very surprising is how resilient the market has been in terms of finding supplies and not actually breaking down. 

Chris Hussey: Yeah. 

Nitin Jindal: There are several things which have- which were done, several protective measures which were taken. Still, have a major, epically major disruption in the market, and prices are, you know, within a tolerable range.

Chris Hussey: Okay, let me explore this one element around inventories. Cause some of the pictures I've been seeing lately is oil inventories are coming down now, and they're down to levels where we haven't seen them normally. Does that get you concerned that we're going into a place where we just have no more oil to give back and we're finally going to get that breaking point? 

Nitin Jindal: If you'd have asked me that question two months ago, my answer would have been absolutely yes.

We were heading into the highest demand window, which is typically summer. Now we are kind of getting out of the demand window, and we were fine in the summer window. So especially for crude oil, I don't think we'll break in next few months. Products might be a different story. We have a very tight products market.

The refining complex stays tight. We are getting less product out of Persian Gulf. We're getting less product out of Russia due to attacks on Russian refining by Ukraine. We're not getting products out of China due to just preservation. So the world ex-Persian Gulf, ex-Russia, ex-China is tight products, and there is no immediate release valve which is coming.

Having said that, prices are already high, so what we like is we like the roll-up, which exists in the market, specially in crack spread space. 

Chris Hussey: Let me explore China for a little bit, if we can, because China has been an area which has had some demand destruction to help out with everything that's taking place.

Can we see any more demand destruction out of China, or is that all we got? 

Nitin Jindal: It's highly unpredictable. Six months ago, nobody could have predicted that China could adjust by that, that much amount. But now that we, we have seen it, let's look at the hard data which makes it happen. China sells 34 million cars a year right now, so their fleet is growing rapidly, but a lot of it is EV.

They can, hence they can switch from gas to electric easy. Their electricity sector is also growing rapidly. Last year, they installed 500 gigawatts of new capacity, mostly solar, some wind, some batteries, some gas. To put it in perspective, US only installed 50 gigs. And hence, they have no shortage of electricity.

They can easily switch if needed without using more hydrocarbons. I would be surprised they can do a lot more, but I would also not be shocked if they did more

Chris Hussey: Okay. So, one last commodity I wanted to talk about was nat gas, because there's a commodity that's more to do with Europe maybe than China, but China needs nat gas.

If they can't get it from the Middle East, they might take it from the US, and then not enough gets to Europe. How much trouble will Europe get in if the Strait of Hormuz isn't reopened here and they can't get the LNG out to the right spots? 

Nitin Jindal: In the short term, it really depends on what happens this winter weather, right?

Like, you must have also heard this term El Niño. El Niños are warm. So if you have a warm, if you have this El Niño which turns out to be very warm, you know, the world is going to get bailed out because the swing in gas demand due to weather is so strong that you can easily manage the supply disruption.

And if you go past this season, there was so much oversupply coming from like US, Australia, that you could see a balanced market. Now, that's only true if you get a very, very warm winter. If you get a normal winter, you have a very tight setup going into this winter. If you get a normal winter, China will literally need to back off because Europe would then compete.

And Europe would not just compete for gas. Europe would compete for gas and coal. Both very important fuels for China. Now, the flip side to that is that China itself produces about 30 BCF a day of natural gas. They have been growing their production. So, if you look at last year or so, China has stopped taking more LNG than what they used to historically take.

Can they actually adjust that down by 20%? Probably, but that's not enough to offset the supply loss we have from Qatar. 

Chris Hussey: Yeah, I guess the ironic good news here is there's a super El Niño taking place here, which suggests normal weather might be less likely than normal. 

Nitin Jindal: Yes. 

Chris Hussey: Okay. Put a bow on all this. What's the trade? 

Nitin Jindal: We like being long crack spreads, right? Specifically, term like Cal 27 cracks are not, you know, pricing continued disruption.

We like being long Asian hydrocarbons versus US hydrocarbons. We think the freight market is tight. It will continue to stay tight. Look, if you look at, you know, Panama Canal is very tight right now. You cannot simply relieve all these supply chain logistics quickly. So, but when you again look at the forward freight market, it's not fully pricing all these dislocations.

We like gold as a debasement trade. We like US nat gas as well going into this winter. Again, assuming normal-ish winter. So those are big themes like. We like US power market on the AI theme. 

Chris Hussey: Okay. What are you looking for in the, uh, couple of weeks ahead here? 

Nitin Jindal: You know, bring the summer to an end. Looking back, for kids to go to school. And I have a trip coming up in Europe next month.

Chris Hussey: All right, great. And hopefully, in the middle of all that, you'll be able to watch a little cricket and see if India can beat Sri Lanka. 

Nitin Jindal: Well, I'll let you know tomorrow. Thank you so much. 

Chris Hussey: Thanks so much. That does it for this week's episode of The Markets. I'm Chris Hussey. Thanks for listening.