US diesel crack surpasses US$100 a barrel for the first time on supply disruptions

The US diesel crack surged past US$100 per barrel for the first time on Monday, driven by supply disruptions stemming from conflicts in Iran and Ukraine, as well as peak agricultural demand. This premium between diesel futures and West Texas Intermediate crude oil futures reached US$102.20 per barrel, a 2.4% increase from Friday.

The crack has hit record highs in five of the past six sessions, highlighting growing worries about fuel availability amid escalating attacks on Middle Eastern refineries that have compounded existing supply issues. Global refinery output averaged 80.9 million barrels per day in July, a 5 million bpd decrease from the previous year, according to the International Energy Agency.

The primary immediate impact is on farmers who rely on diesel for machinery during harvests in the northern hemisphere and planting in the southern hemisphere. Longer-term, the crisis could affect various sectors, including manufacturing, heavy transport, and power generation, where diesel is extensively utilized. Global diesel inventories have faced significant pressure due to ongoing conflicts, with key suppliers Russia and the Middle East affected.

Russia has suspended international diesel sales until January following Ukrainian attacks on its refineries, while Middle Eastern exports have been hampered by Strait of Hormuz shipping disruptions. US refiners have ramped up diesel production to capitalize on record-high cracks, but domestic stockpiles have been dwindling due to robust export demand, as noted by Shohruh Zukhritdinov, chief executive of NitrolOil.

Distillate fuel inventories, encompassing diesel and heating oil, were at their lowest level for this time of year since 1996, with 107.1 million barrels as of August 7, according to the Energy Information Administration. Zukhritdinov stated that the situation is no longer a refinery incentive issue but rather a global capacity and replacement-barrel problem.

Diesel markets may face additional strain due to US actions targeting Iranian exports and potential penalties on China for purchasing Iranian crude oil, according to Scott Shelton, an energy specialist at TP ICAP. "The U.S. policy could complicate China's efforts to maintain refinery output levels, potentially exacerbating the diesel crisis," Shelton warned in a note to clients.

China's crude oil imports in July declined by nearly 16% compared to the previous year, data from the National Bureau of Statistics revealed.