Diesel prices climb as global buyers compete for shrinking supply

U.S. distillate exports hit record, inventories at 30-year seasonal low

The squeeze across global refined-product markets is pushing diesel prices higher as buyers compete for shrinking supplies, with the U.S. at the center of a scramble that could intensify into the winter. Gasoline, diesel and jet fuel compete for the same refinery capacity, and disruptions in Russia and the Middle East have forced international buyers to seek replacement fuel cargoes from the U.S. and India.

Russia — traditionally one of the world’s largest exporters of refined fuels — had to cut domestic fuel production and restrict diesel exports after sustained Ukrainian attacks on its refineries. That has left major buyers such as Brazil and Turkey to compete with Europe for replacement cargoes from the U.S. and India.

In the Middle East, the war has curtailed flows through the Strait of Hormuz, a critical waterway that carries large volumes of Gulf oil and refined products. China has yet to resume petroleum-product exports to Asia at normal levels because of concerns about potential shortages at home. As a result, Europe has increasingly relied on U.S. exports.

The benchmark price for European diesel hit $167 a barrel late last week, compared with about $87 a barrel a year earlier, according to data collected by price reporting agency OPIS, which is owned by Dow Jones. The diesel crack spread in northwest Europe — the premium of diesel over crude — was at around $90 a barrel on Friday, compared with an average of $24 a barrel last year.

American refiners are capitalizing on extraordinary refining margins, sending more fuel into international markets. Exports of distillate fuel — which includes diesel, heating oil and other products — rose to 1.9 million barrels a day in the first week of August, the highest weekly number on record. The surge is helping fill a widening global supply gap, but it is leaving the domestic market with a thinner cushion: inventories are at their lowest level for this time of year in three decades.

“Those flows are drawing down already tight U.S. inventories, the only major hub open for business, creating a global competition for fuel that is pushing diesel cracks back toward record seasonal highs,” analysts at Bank of America said.

The tightening traces in part to the war with Iran. When Iran effectively closed Hormuz after the war with the U.S. started on Feb. 28, refiners shifted production toward jet fuel amid fears of a global shortage, tightening diesel supplies in the process. Jet fuel and diesel are both middle distillates derived from crude oil, limiting refiners’ ability to boost one without reducing the other.

The squeeze matters because diesel powers much of the global economy. Trucks use it to move food and manufactured goods; construction companies rely on it for heavy equipment, and ships burn it for fuel. Diesel is also a major heating fuel in parts of Europe and elsewhere. A sustained shortage can raise costs across the economy, as higher diesel prices can feed into freight rates, food prices, construction costs and consumer fuel bills.

The timing is unfavorable. The Northern Hemisphere is entering harvest season, when farmers consume large quantities of diesel to run tractors and other machinery. Heating-fuel demand typically increases as temperatures fall later in the year, while refineries will begin seasonal maintenance, temporarily taking some production capacity offline. Goldman Sachs warned last week that diesel faces a greater risk of persistent scarcity than crude as winter approaches, noting the market was already tight before the Iran war began. Bank of America said the market is entering its strongest seasonal demand period with “very little margin for error.”

Normally, a sharp increase in price eventually reduces consumer demand in a process economists call demand destruction. Diesel, though, is particularly resistant to rapid demand destruction because much of its consumption is difficult to eliminate in the short term. A trucking company can’t quickly replace its fleet, and a farmer cannot stop using diesel during harvest. “Diesel demand continued to remain fairly strong even in the wake of higher retail prices, as there is not much alternative for fuel needed for industrial activities,” said June Goh, senior oil market analyst at Sparta Commodities.

The outlook now depends heavily on whether lost supplies return. A recovery in Russian refining and exports or a normalization of Middle Eastern flows could ease the squeeze. But if disruptions persist, global buyers are likely to keep turning to U.S. refiners.