Distillate inventories sit 12% below year-ago levels
Diesel prices remain stubbornly high as inventories sit near historically low levels, despite efforts to ease pressure on refined-fuel markets through emergency stock releases or the easing of restrictions on Russian exports, The Wall Street Journal reports.
Wholesale diesel benchmarks in the U.S. and Europe have more than doubled year to date, the Journal reported. The problem is not simply expensive crude but a shortage of refined products. New York Harbor distillate crack spreads, a key measure of U.S. diesel refining margins, are holding above $100 a barrel, while ICE gasoil crack spreads, the European equivalent, have retreated from recent highs but remain elevated at $78.77 a barrel.
U.S. distillate inventories, which include diesel and heating oil, stood at about 102.6 million barrels in the week ended Oct. 9, according to the Energy Information Administration, down 12% from a year earlier. The shortfall was more pronounced on the East Coast, where inventories were more than 22% lower than a year earlier. Diesel is a major input for trucking, agriculture, construction and industrial activity, meaning elevated prices can feed into freight charges and the cost of moving goods. U.S. retail diesel prices were about $6.33 a gallon on Friday, down from a record $6.53 last month but still 73% higher than a year ago.
President Trump said Russia had agreed to lift a self-imposed export ban and ship hundreds of thousands of tons of diesel into global markets, with the U.S. suspending sanctions on Russian energy exports for about six months to facilitate the deliveries, according to the Journal. But the shipments amount to just over 100,000 barrels a day in October and about 125,000 barrels a day in November, compared with roughly 800,000 barrels a day that Russia exported last year.
Energy analysts and traders say the deal to temporarily resume diesel exports is unlikely to provide significant price relief, the Journal reported, because the volumes involved are too small to ease the global supply squeeze. “It won’t be enough to bring down the price of diesel dramatically,” said Michelle Brouhard, head of policy and geopolitical risk at Kpler. The data provider estimates that the global diesel market faces a supply deficit of about 1 million barrels a day.
Any relief from resumed exports or a potential easing of sanctions will also depend on whether Russian refineries can increase output without remaining vulnerable to Ukrainian strikes, the Journal reported. “If Russia could export diesel, it would export diesel,” Brouhard said. “They’re having a hard time getting enough diesel just for their domestic consumption.”
Russia, one of the world’s largest exporters of refined products, restricted diesel exports this year following Ukrainian attacks on its refineries — a response to Moscow’s continued strikes on Ukrainian cities and critical infrastructure — while disruptions to key Middle East shipping routes have further tightened the market, the Journal reported. U.S. refineries have boosted their diesel exports, but they are running near capacity and are unable to make up for more of the global shortfall.
Record freight rates, longer voyages and rising geopolitical risks are driving up the cost of moving crude and refined products between regions, leaving Europe particularly vulnerable as it heads into winter with low petroleum-product and natural-gas inventories, the Journal reported. Soaring freight costs are eroding refinery profitability in Europe and Asia, despite elevated diesel crack spreads. According to the International Energy Agency, higher crude delivery weighed on margins outside North America in September, raising the risk that some refiners could cut output and further deepen the global squeeze.
Additional supplies or a potential relief of sanctions on Russia might lower some cost pressures, but cannot quickly make up for lost supply to damaged refineries, depleted stocks and disrupted trade routes, according to market watchers.
Other policy measures offer little more than temporary relief, the Journal reported. Europe’s planned release of over 20 million barrels of diesel from emergency stocks through the IEA will bring additional supply to the market in the near term, helping to ease market tightness, though it also reduces the buffer against future disruptions. In the U.S., tax cuts and regulatory relief could ease the burden on consumers but also sustain demand and prolong tight market conditions. Restricting distillate exports could help replenish domestic inventories, though it would shift the supply squeeze to trading partners in Europe and Latin America.
“Policy intervention can provide temporary relief, but there is no silver bullet for diesel,” analysts at Bank of America said, according to the Journal. “A warmer-than-normal winter across Northwest Europe and the U.S. Northeast would clearly provide some relief, particularly if heating demand remains contained. But the market has increasingly little protection if the weather turns colder.”
Inventory draws are projected to accelerate in October as seasonal demand rises and refineries undergo routine maintenance, the Journal reported. The approaching Northern Hemisphere winter leaves the market with little margin for error: until refining output recovers, inventories rebuild and shipping risks ease, efforts to lower diesel prices are likely to face significant limits.
Giulia Petroni covers energy and commodity markets for The Wall Street Journal and Dow Jones Newswires in Barcelona, primarily focusing on oil, gas, and metals. She previously covered big oil and gas companies and reported on low-carbon technologies, such as green hydrogen and nuclear fusion. She joined Dow Jones in 2019.