Global Diesel Supply Faces Growing Strain Amid Strait of Hormuz Crisis

Global supply chains are facing major disruption amid the crisis surrounding the Strait of Hormuz, but market participants remain hopeful that the conflict will eventually end and that energy prices will decline.

However, a more immediate concern is emerging: global diesel supplies are tightening, raising the prospect of higher fuel prices and additional inflationary pressure on the world economy.

Diesel prices have risen steadily in recent months, driven by strong demand from the agricultural sector and fears of supply disruptions caused by ongoing conflicts. The diesel crack spread—the difference between the price of a barrel of crude oil and the price of refined diesel—has reached record levels in both the United States and Europe this week.

While crude oil markets largely reflect traders’ expectations about near-term supply, the diesel market is providing a clearer warning of an actual shortage of refined fuel.

In the United States, the diesel crack spread climbed into triple digits for the first time this week. The wars involving Iran and Ukraine have added to market volatility and disrupted fuel supplies from major producing regions.

Supplies from the Middle East and Russia have been significantly affected, while China’s fuel exports have yet to recover substantially after months of restrictions aimed at protecting domestic supplies. At the same time, the Strait of Hormuz has remained largely closed, further restricting the movement of energy products.

Refineries in the United States and Europe are operating at or near maximum capacity in an effort to compensate for lost supplies from the Middle East, Russia and China. But the additional production has provided only limited relief.

Global inventories of middle-distillate fuels, particularly in the United States, are declining rapidly. US inventories are currently 12% below the five-year average for this time of year.

Strong refining margins have encouraged many refineries to postpone scheduled maintenance and continue operating at close to full capacity. This, however, leaves the diesel market particularly vulnerable: any major disruption or unexpected refinery shutdown could send prices to new record highs.

Rohit Rathod, senior oil market analyst at Vortexa, said refining margins worldwide were close to record levels, largely because of a serious and deteriorating diesel shortage.

Russian diesel exports have also been hit after Ukrainian drone attacks damaged several Russian refineries, prompting Moscow to restrict diesel exports. Meanwhile, the conflict involving Iran and the crisis around the Strait of Hormuz have created transportation difficulties across the Middle East.

According to Vortexa data, diesel and gasoil exports from the Middle East and Russia have fallen by more than 50% in recent weeks, dropping from around 3.3 million barrels per day to just 1.6 million barrels per day.

The combination of falling inventories in the United States and Europe and insufficient supply to meet demand has left the global diesel market under severe pressure. In the United States, the average diesel price has risen 8% in one month and is now more than 40% higher than the year-ago average of $3.69 per gallon.

Diesel demand could increase further in the coming weeks. Farmers in many countries will begin preparing for the harvest season, while truck operators are expected to transport more goods as retailers build inventories ahead of the holiday season. Demand for gasoil used as heating fuel is also likely to increase as winter approaches.

High prices may reduce gasoline consumption to some extent, but diesel demand is much less flexible. Industries such as agriculture, freight transportation and heating depend heavily on diesel, making it difficult for consumers and businesses to quickly reduce usage even when prices rise.

“Diesel is the lifeblood of the economy; you cannot simply switch it off,” Robert Campbell of Energy Aspects told the Financial Times.

With diesel remaining essential to economic activity, prices could rise further in the weeks ahead. That would increase inflationary pressure on goods and transportation costs and could put additional strain on US consumers ahead of the midterm elections in November.