April 29, 2008 / 1:49 PM / in 9 years

World power crunch tightening diesel market

4 Min Read

<p>A sign advertising the cost of Diesel fuel is seen at more than $5 per gallon as a motorist prepares to pump gas into his vehicle at a gas station in New York, April 24, 2008.Joshua Lott</p>

NEW YORK (Reuters) - Rising electricity demand, aging power infrastructure and fuel shortages in developing countries are boosting global demand for diesel -- factors that could keep supplies tight and prices strong for another couple of years.

The boom in use of diesel for electric generators in parts of Asia, Africa, the Middle East and Latin America has already underpinned a big rally in distillate prices since last year and helped propel crude oil well above $100 a barrel even as energy demand wanes in the United States and Europe.

"You have a shortage of power generation capacity in parts of the world, including the Middle East, causing brown outs and blacks outs, and increasing incremental demand from back-up generators that run on diesel," said Antoine Halff, oil analyst for Newedge Group in New York.

Shortages of natural gas in Chile and Argentina, a power crunch in South Africa, along with rising fuel demand in China and the Middle East are the key drivers of the distillate boom -- piling on top of already robust diesel use in Europe for automobiles, experts said.

Heating oil futures on the New York Mercantile Exchange -- the U.S. benchmark for diesel -- have jumped nearly 140 percent since a year ago, outpacing a rally in crude prices of 80 percent over the same period. London gas oil has also soared to record heights, gaining 83 percent since last year.

The strong distillate market comes even as analysts scale back global energy demand forecasts due to the U.S. economic crisis, which has seen motorists cut back on driving as prices for gasoline surge.

The drag of the U.S. economy helped prompt the International Energy Agency to lower its 2008 global demand forecast by 310,000 barrels per day to 1.3 million bpd, with demand from OECD nations now expected to fall 200,000 bpd.

"Global oil demand growth in the first quarter was almost entirely made up of middle distillates and not all of it was structural," wrote Jan Stuart of UBS Securities in a report.

Big Generator Demand

Demand for distillates to fuel diesel generators has increased 250,000 bpd in China, South Africa and Latin America since the beginning of the year, according to Goldman Sachs.

"These regions have suffered from significant structural losses in power-generation capacity that can only be replaced by temporary oil-fired generation capacity, with diesel-fired capacity being the most easily accessible form," the firm wrote in a research note.

Cooling demand in the Northern Hemisphere and heating in the Southern Hemisphere could keep demand growing, according to Goldman Sachs. Additional strength could stem from industrial generation needs for industrial output, particularly metals in Chile and South Africa.

Chile's diesel imports are expected to jump as much as 10 percent this year due to shortages of natural gas and hydro power while the country launches a multi-year plan to shore up electricity supply.

In South Africa, mining companies have turned to diesel generators to combat a power crisis that has darkened homes and businesses across Africa's top economy.

China's booming economy, which has been one of the fundamental forces behind crude's five-fold surge in prices over the past six years, has also been using more diesel-powered generators to overcome shortages and to ensure adequate supply at the Olympic games this summer.

The gains came on top of European diesel demand, which has roared due to the fuel's growing popularity with motorists.

Additional reporting by Emma Graham-Harrison; Editing by John Picinich

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