Diesel's Premium Over Gasoline Sparks Market Shift as Crude Prices Plunge

The energy markets are in a state of flux, with diesel’s premium over gasoline reaching levels unseen since winter and crude oil prices languishing near multi-year lows. This divergence reflects a structural shift in supply-demand dynamics, geopolitical tensions, and refining bottlenecks that are reshaping investment strategies.

Diesel’s Unusual Strength Signals Supply Tightness

The NYMEX May ULSD (diesel) contract has surged to a 7.5-cent premium over May RBOB gasoline, a stark reversal from historical norms. Typically, gasoline outperforms diesel in spring as seasonal driving demand picks up, but this year’s market is defying expectations.

At the heart of the shift is a short squeeze in New York Harbor diesel, driven by delayed restarts at the Phillips 66 Bayway refinery after maintenance. With inventories already tight, traders scrambling to cover short positions have pushed May ULSD to $2.175/gallon, briefly nearing $2.20—a level not seen since February. Meanwhile, May RBOB has slumped to $2.10/gallon, underscoring gasoline’s underperformance.

The June spread also reflects diesel’s resilience, with a 1.1-cent premium, suggesting the tightness isn’t just a May-specific phenomenon. Elaine Levin of Powerhouse notes this is “a classic case of physical market tightness spilling into futures,” as traders anticipate prolonged refinery outages and logistical bottlenecks.

Crude Oil’s Bearish Cycle Intensifies

While diesel holds up, crude oil faces relentless headwinds. WTI has plummeted to $62.03/barrel, a $1 drop from recent levels, while Brent trades at $65.72/barrel—both near their lowest since late 2021.

The primary culprit? OPEC+’s chronic overproduction. Despite a planned May output hike of 411 kb/d, member states—led by Saudi Arabia, Iraq, and the UAE—are already exceeding quotas by 390 kb/d, flooding the market. Saudi Arabia’s crude output hit 9.01 million b/d, exceeding its 8.96 million b/d quota, while Russia’s three-day ceasefire in Ukraine failed to reassure traders.

Adding to the gloom, U.S. tariffs and trade disputes have cut global demand forecasts by 300 kb/d, with fears of deeper cuts if non-energy trade wars escalate.

Investment Implications: Short-Term Opportunities, Long-Term Risks

The market’s bifurcated nature presents distinct opportunities and pitfalls:

Short-Term Plays:
- RBOB/ULSD Futures Spread: Consider long positions in June contracts if U.S. gasoline and diesel demand holds up post-Easter, especially if refinery outages persist.
- Crude as a Hedge: Use crude oil futures to offset equity market volatility tied to Fed policy or geopolitical risks.

Long-Term Themes:
- Refining Capacity: Invest in refiners with access to low-cost crude (e.g., Caribbean or Asian facilities) and flexibility to shift output toward diesel, which remains structurally tight.
- Geopolitical Leverage: Monitor U.S.-Iran nuclear talks and OPEC+ compliance to anticipate price swings.

Conclusion: A Bearish Crude Outlook, Bullish on Refined Products

The data paints a clear picture: diesel’s premium over gasoline is a symptom of systemic tightness in distillate markets, driven by refinery constraints and geopolitical uncertainty. Meanwhile, crude’s bearish cycle is entrenched by OPEC+ overproduction and macroeconomic headwinds.

With OPEC+ output likely to stay elevated and non-OPEC+ supply growth outpacing demand by 230 kb/d in 2026, crude’s path to $70/bbl remains blocked. Investors should prioritize downstream opportunities (e.g., the ULSD/RBOB spread) while hedging against crude’s downside. The market’s next pivot hinges on whether OPEC+ can rein in overproduction—or if demand collapses further. For now, the energy complex is two markets in one, and navigating the divide will define winners and losers in 2025.