The margin for refining diesel from crude oil in the US, known as the diesel crack spread, surged to over $100 a barrel this week, setting new all-time highs. This critical measure of refining profitability hit $102.20 a barrel on Monday, marking the first time it has settled in triple digits. The crack spread remained around $100 a barrel on Tuesday, slightly down from its peak. This unprecedented increase highlights a significant global fuel-making crunch, with the spread hitting new intraday record highs in five of the last six trading sessions.
Several factors are contributing to this severe tightening of diesel supplies. The ongoing wars in Iran and Ukraine have led to substantial disruptions, with fresh attacks on Middle Eastern refineries adding to existing supply issues. Furthermore, Middle Eastern and Russian diesel exports have plummeted by more than 50% in recent weeks, falling from approximately 3.3 million barrels per day (bpd) to just 1.6 million bpd, according to Vortexa data. Threats of US sanctions against Chinese imports of Iranian oil could further exacerbate the situation. Although the US ramped up diesel production, making 5.3 million barrels of distillate fuel oil daily in July—potentially the highest for that month—it has not been enough to offset the global deficit.
This tightening market has pushed retail diesel prices significantly higher. The weekly Department of Energy/Energy Information Administration average retail diesel price rose by 19.8 cents per gallon to $5.652 per gallon, making it the highest since the war in Iran began in early March. This is up 39.5 cents per gallon in the last two weeks. In contrast, retail gasoline prices have remained relatively stable, with the AAA average daily gasoline price at $4.0969 per gallon, almost unchanged from a month ago, while retail diesel was $5.6199 per gallon on Tuesday, up from $5.2778 per gallon a month prior. The average US diesel price currently stands at $5.47 per gallon, an 8% increase in one month and over 40% higher than the $3.69 per gallon a year ago.
The record crack spreads signal a much tighter oil market than suggested by crude oil futures, which have rarely topped $100 per barrel despite significant disruptions. Refineries in the US and Europe are operating at near-capacity to compensate for lost supplies from the Middle East, Russia, and China. However, this is only a partial relief, as middle distillate inventories globally, including in the US, are 12% below the five-year average for this time of year. Analysts like Rohit Rathod from Vortexa note that global refinery margins are near record levels due to a severe and worsening diesel shortage. With seasonal demand expected to rise as farmers prepare for harvest, truckers transport goods for holidays, and households purchase heating oil, diesel prices could climb further, increasing inflationary pressure on economies.
