$100 Diesel Cracks Signal a Much Tighter Oil Market Than Brent Suggests
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…
Crack spreads for diesel have reached record highs in both the United States and Europe, indicating an exceptionally tight oil market beyond what crude oil futures suggest. Crude oil futures have rarely surpassed $100 per barrel over the past six months as tanker traffic through the Strait of Hormuz is minimal compared to pre-war levels.
Diesel demand remains stagnant, and supply is critically scarce due to the conflicts in Iran and Ukraine, which hindered Middle Eastern and Russian production. China's fuel exports have yet to rebound from months of domestic supply protection measures, and the Strait of Hormuz remains largely closed.
Refineries in the U.S. and Europe are operating at full capacity to compensate for the loss of diesel from these regions, but global middle distillate inventories are declining, dropping 12% below the five-year average for this time of year. Refinery margins are near record levels due to the severe diesel shortage, and a single unexpected disruption could push diesel prices to new record highs.
The lack of diesel supply from Russia and the Middle East has plummeted by more than 50% to just 1.6 million barrels per day, causing global diesel markets to become precariously tight.
The average U.S. diesel price is now $5.47 per gallon, an 8% increase in one month and over 40% higher than the same period last year. Diesel demand is expected to rise in the coming weeks as farmers prepare for harvest, truckers transport goods for holiday stocking, and households purchase gasoil for winter heating. Despite gasoline experiencing some demand destruction due to high prices, diesel demand is more inelastic.
As diesel is crucial for the industrial economy and turning it off is not feasible, prices may continue to climb, potentially contributing to inflationary pressures and higher consumer costs ahead of the U.S. midterm elections in early November.
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