The global refining sector is experiencing a significant diesel crunch, which analysts and traders predict will result in tight supplies and high prices for months, ultimately weighing on demand. This situation is largely driven by over six months of war in the Persian Gulf impacting output and recent flare-ups, alongside Ukrainian drone strikes on Russian refineries. These strikes have led Russia to extend its ban on diesel exports, further tightening global supply.
US diesel inventories ended August at their lowest level for that time of year in several decades, according to the US Energy Information Administration (EIA). This is a troubling sign as the fall maintenance season for refineries and the winter heating season approach. While national distillate stocks at 104.2 million barrels for the week ending August 28 are not an all-time low (record low was 87.2 million in April 1996), East Coast (PADD 1) stocks hit a record low of 19.3 million barrels on August 28, a 37-year record. The US is also experiencing its lowest late-August diesel days of supply on record at 28.5 days.
Several factors are converging to create this shortage. A structural global supply deficit has removed roughly half of the world’s net diesel from the market. Russia and the Middle East, key contributors to global diesel supply, have been significantly sidelined due to conflicts and export bans. Ukrainian drone attacks have reportedly knocked out around 3 million barrels per day of Russia's refining capacity, affecting 80% of its refineries, and Middle Eastern disruptions have cut refined product exports by 3-4 million barrels per day. Despite US refinery utilization hitting a record 98%, US diesel exports reached a record 54.2 million barrels in August, averaging 1.77 million barrels per day, as the country attempts to fill the global supply gap. This export surge is contributing to the domestic inventory drain.
The price of diesel reflects the tight market. The EIA weekly pump price was $5.60 a gallon on August 31, placing it in the 99th percentile of 32 years of data, and just $0.21 below its record of $5.81 set in June 2022. GasBuddy reported a daily national average of $5.82 a gallon on September 3, exceeding the June 2022 record. New York diesel prices hit the equivalent of nearly $200 per barrel on September 1, roughly double Dated Brent, and the USGC ULSD crack spread reached an all-time high of $98.15 per barrel on the same day. Experts warn that the market has lost its buffer and is highly susceptible to further price increases from additional disruptions, particularly as demand for fall harvest, early winter heating, and refinery maintenance converge in October-November.
