The oil market has remained complacent for months amid the worst disruption in global supply, with crude oil futures rarely topping $100 per barrel over the six months in which tanker traffic at the Strait of Hormuz is a trickle compared to pre-war levels.
While market participants have been putting too much hope of a resolution of the conflict in their bets on future crude prices, product supply of the fuel of the economies – diesel – has been shrinking.
So much has the diesel market tightened in recent months that the diesel crack spread, the pricing difference between a barrel of crude oil and the diesel refined from it, hit record highs in both the United States and Europe this week.
The crude oil market shows traders’ expectations of near-term supply, but the diesel markets are flashing the very real physical tightness of the petroleum product whose consumption has yet to rise this year and whose availability and prices drive economies and inflation.
The diesel crack spread in the United States hit triple digits this week, for the first time ever. The premium over crude prices jumped to as high as $102 per barrel on Monday, before easing slightly to about $100 a barrel on Tuesday.
The diesel markets are roiled by the wars in Iran and Ukraine, which stifle product supply out of the Middle East and Russia, while Chinese fuel exports have yet to meaningfully rebound following months of restrictions to protect domestic supply, with the Strait of Hormuz mostly closed.
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Refineries in the U.S. and Europe are running flat out to offset the lost diesel supply from the Middle East, Russia, and China.
The relief is only partial, as middle distillate inventories are crashing worldwide, including in the United States, where they are now sitting 12% below the five-year average for this time of year.
The near-capacity runs at refineries, many of which delay planned maintenance to boost supply amid record refining margins, raises the odds of the diesel market being one hurricane or one unexpected stoppage away from new record highs.
“Refinery margins globally are near record levels, driven largely by a severe and worsening diesel shortage,” Rohit Rathod, senior oil market analyst at energy flows analytics firm Vortexa, said this week.
Russia’s ban on diesel exports following Ukrainian drone attacks on Russian refineries and the Middle East’s shipping problems amid the Iran war have sunk diesel availability from these regions.