A Perfect Storm for Diesel Prices

A Perfect Storm for Diesel Prices
Diesel market prices are soaring all over the world.

Diesel market prices are soaring all over the world amid low stockpiles and supply pressures.

The cost of diesel relative to crude oil is at its highest in more than two years in Singapore and the U.S., while in northwest Europe, it’s at the most in 21 months. Supplies from oil refineries are being hampered by outages and market conditions and with relatively low stockpiles around the world, there’s only a limited cushion to absorb market shocks.

“Supply is being limited by constrained refinery runs in Europe where high natural gas prices have steeply increased operating costs for some refiners,” said Jonathan Leitch, an oil market analyst at Turner, Mason & Co. “There is also some disruption from planned and unplanned shutdowns across the world.”

Among the latest disruptions are delays to gasoil deliveries from a Taiwanese facility after a fire, and planned work at Europe’s largest plant, the Pernis refinery in the Netherlands.

Stronger jet fuel margins have also given refiners an incentive to switch production away from diesel, further limiting supply, Leitch said. China has also cut its fuel export quota.

It’s not just diesel’s premium to crude oil that’s surging. In Europe, the bullish structure of the fuel’s forward curve is also strengthening, with the prompt contract becoming increasingly more expensive versus the following month.

European diesel traders may also be pricing in a risk premium for the ongoing tensions between Russia and Ukraine. Russia exports an estimated 900,000 barrels of diesel-type fuel by sea every day, according to JBC Energy. Much of this ends up in Europe, meaning any disruption could lead to supply shortages. 

“One sanction that has been mentioned is removing Russia’s access to U.S. dollar banking,” Leitch said. “This would obviously cause a problem in paying for diesel imports from Russia to Europe.”

--With assistance from Elizabeth Low.

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