Impending Months May See Critically Low Diesel Inventories

The present status of the global diesel market would have undoubtedly triggered apprehension in several countries. Diesel prices across the globe have surged to unprecedented heights in comparison to the crude oil from which it derives, signaling a scarcity that should reverberate concerns among governments vigilant about inflation. Furthermore, with the approach of the winter season in a matter of months, the demand for heating is set to amplify.

A silver lining emerges when comparing the current scenario to the conditions observed a year ago in the aftermath of the Russia-Ukraine crisis. Prices eventually subsided, partially due to a relatively mild winter. However, the prevailing diminished stockpiles in the present day leave no room for bullish market surprises. The threat of supply limitations and demand shocks looms large, be it from sudden supply constraints or unforeseen weather-related surges in demand.

Eugene Lindell, head of refined products at industry consultant FGE, emphasized the urgency of stockpiling at this juncture, given the typical seasonal drawdown starting from September. The looming concern is the insufficient stock buildup before October, which could lead to draws from an already precariously low inventory.

The focal point of the diesel supply apprehensions lies in Europe and the US Atlantic Coast, where refining capacity curtailments and refinery outages are contributing to the strain. In the midst of this supply crunch, oil markets are grappling with soaring fuel margins and reduced global supplies due to refinery cutbacks, coinciding with certain crude producers restraining their output.

Consultancy Wood Mackenzie anticipates a decline in stockpiles of diesel-type fuel in northwest Europe in the coming months, a pattern typical for this period. However, current inventories fall below historical norms, although they remain higher on a year-on-year basis.

Emma Howsham, a research analyst specializing in refining and oil product markets at Wood Mackenzie, explained that Europe's diesel/gas-oil supply outlook is strained due to lighter crude slates yielding lower diesel/gas-oil, a shift to jet yields, and unexpected refinery outages. Demand is projected to rise until November.

China's role is also under scrutiny as its refiners await new fuel export quotas from the government. While increased Chinese flows could potentially alleviate the tightness in supply, this may only offer marginal relief. Surprisingly robust domestic diesel demand in China, driven by infrastructure spending offsetting property market losses, has hindered stockpile accumulation even during periods of weaker demand.

In the United States, retail diesel prices have climbed consistently since late July, exerting more impact on inflation than gasoline in August. Refiners have been unable to bolster inventories due to unfavorable market conditions, mirroring the situation from the previous year.

The current scenario reflects a challenge faced by nations striving to transition away from fossil fuels while grappling with the conundrum of phasing out oil refineries. Diesel, with its diverse applications across vehicles, shipping, heating, and machinery, is a critical component of global petroleum product demand. The repercussions of shortages and price fluctuations ripple through supply chains, affecting governments, industries, and sectors.

The ongoing scarcity is reminiscent of last year's high diesel prices that triggered trucker strikes across Asia, pressuring governments to mitigate inflation stemming from escalating energy costs. In the United States, the escalating costs impact bulk purchasers such as farmers and trucking companies. This situation underscores the dilemma countries face as they endeavor to shift from fossil fuels while confronting the challenge of phasing out oil refineries.