The global fuel squeeze is intensifying, with European diesel prices having jumped 70% since the war began. In the U.S., diesel crack spreads reached an unprecedented $102 per barrel earlier this week, though they eased slightly to around $100. This marks the first time in over a year that diesel is more expensive than jet fuel in Europe, according to LSEG data cited by Reuters. Refinery margins globally are at record highs as this energy crisis unfolds, driven by a severe and worsening diesel shortage.
The primary bottleneck is refining capacity. Approximately one-fifth of Middle Eastern refining capacity, amounting to some 9.6 million barrels daily, has been knocked out by hostilities, as reported by the International Energy Agency. Ukrainian attacks on Russian refineries have also removed millions of barrels of fuel production. This disruption has caused diesel and gasoil exports from the Middle East and Russia to plummet by over 50% in recent weeks, from about 3.3 million barrels per day to just 1.6 million barrels per day, according to Vortexa data.
Despite sub-$100 crude prices, dwindling inventories are expected to prolong the crisis for months. Global middle distillate inventories are crashing, with U.S. stocks currently 12% below the five-year average for this time of year. Goldman Sachs analysts warned that global diesel stocks were already tight before the Middle East conflict. The U.S. has been increasing fuel exports, reaching an all-time weekly average high of 1.9 million barrels daily, partly due to inventory draws. Bank of America analysts noted that these flows are draining already tight U.S. inventories, intensifying global competition for fuel.
This tightening supply situation is driving up inflation risks. Global refinery runs in the second quarter were 5.1 million barrels daily below last year's levels, while demand for fuels fell by only 4 million barrels daily, creating a gap of over 1 million barrels daily. This demand destruction was forced by soaring prices rather than being voluntary, indicating limited protection against inflation. As winter approaches in the Northern Hemisphere, demand for diesel for transport and heating will rise, further escalating prices. The average U.S. diesel price is already at $5.47 per gallon, an 8% increase in one month and over 40% higher than the $3.69 average from a year ago.
However, there has been a recent softening in European diesel margins. European diesel refining margins fell over 7% as the low-sulphur gasoil premium to Brent crude narrowed by $5.52 to $70.79 per barrel. This is due to a substantial surge in seaborne fuel imports into Europe, with combined diesel and gasoil imports into the EU and UK projected to average 724,000 barrels per day in August, a 55% jump from 466,000 barrels per day in July. U.S. Gulf Coast refineries have played a crucial role, supplying approximately 446,000 barrels per day across the Atlantic, accounting for over 50% of Europe's August fuel imports. This influx has provided temporary relief to European consumers, but the underlying global supply tightness remains a significant concern.
