(Sept 9): The global refining sector’s diesel crunch is likely to result in tight supply for the coming months, keeping prices high and weighing on demand, according to analysts and traders.

On top of more than six months of war in the Persian Gulf, impeding output there — and a fresh flare-up over recent days — the market is contending with the impact of Ukrainian drone strikes on Russian refineries, which have prompted the country to extend a ban on diesel exports. 

Fuel exports lost from the major processing hubs in the Middle East and Russia now amount to two million barrels a day each, Vitol Group’s CEO Russell Hardy told the Asia Pacific Petroleum Conference run by S&P Global Energy in Singapore. With refiners elsewhere already at their limit, consumers have turned to distillate fuel stockpiles and will keep drawing.

“We’re still not running enough refining capacity to prevent those draws,” he said.

The price of diesel — known as the workhorse fuel of the global economy — has run ahead of crude since the start of the war, with the jump in the ICE gasoil benchmark more than twice that seen for Brent, creating inflationary pressures even while oil has remained relatively stable. Crude prices are now also running toward US$100 for the first time since July.

In the US, retail diesel has hit records above a former peak set in June 2022.

Eye-watering diesel margins have incentivised refiners outside Russia and the Middle East to run hard to capture gains but the clock is ticking on how long they can keep up the feat. Refinery equipment gets increasingly vulnerable to breakdowns if operated at high utilisation rates for too long. That could mean an outage at a time where buffers are limited, exacerbating the crisis.

“If we can sustain until the end of this year, it is going to be an achievement,” Shaikh Khaled Al-Sabah, managing director for international marketing at Kuwait Petroleum Corp, said of the global refining system. That creates the risk of “a huge shortage that’s going to be seen quite soon” in fuels, he added.

US exports have helped alleviate tightness, particularly in import-dependent Europe. But that may not hold as diesel consumption there begins to increase as temperatures drop, given the US is not producing more, even as shipments have climbed.

“I think we’re going to see a very difficult winter coming in Northwest Europe,” said KPC’s Al-Sabah. “This is only the beginning.”

Uploaded by Arion Yeow