The Diesel Crisis Is Far From Over

• Despite expectations of an economic slowdown, diesel demand appears to be rising unabated.
• For some countries around the world, diesel shortages are already a reality, and European countries are racing to secure diesel ahead of the embargo on Russian barrels.
• For the U.S., with the harvest season in the Midwest looming, it will be a case of balancing domestic and international demand for diesel.

Despite growing fears of a global economic slowdown, diesel supply continues to be a concern, and the situation may yet become even worse than it is now.

Reuters' John Kemp wrote in his latest oil-buying column that hedge funds and other institutional traders had bought diesel contracts at the fastest rate since November 2020 last week, adding the equivalent of 9 million barrels to their holdings.

Meanwhile, Bloomberg reported that demand for U.S. diesel specifically had hit the highest level in five years, and it may rise even further as we head into winter. U.S. diesel exports reached an all-time high last month, with South America and Europe taking in most of these exports.

At the same time, India has imposed limits on diesel exports to ensure there is enough for the domestic market. On top of that, Russian diesel is being shunned by European buyers because of sanctions, even though the fuel embargo against Russia is only coming into effect at the end of the year.

The diesel shortage problem is not exactly a new one, but it is now garnering plenty of attention.

"Governments have a very clear understanding that there is a clear link between diesel and GDP, because almost everything that goes into and out of a factory goes using diesel," said a senior executive from the European Petroleum Refiners Association in March, soon after the EU began slapping sanctions on Russia.

Russia is the EU's largest diesel supplier, sending some 750,000 barrels daily there to power its heavy industry, freight transportation, and a host of other industries underpinning the bloc's economy.

But in addition to the sanctions, the diesel market seems to have experienced the same that the crude oil market experienced: a much faster demand rebound than supply growth.

This demand growth recently slowed down, with Kemp reporting last month that expectations of a global slowdown amid central bank rate hikes and inflation had begun to discourage strong diesel demand and lead to lower prices, but it appears this was temporary and demand for the industrial transport fuel is once again on the rise.

In another column, however, the Reuters market analyst noted that U.S. crude oil inventories were not recovering despite fuel price inflation, which meant the tightness in the fuel markets—and high prices—were likely to continue into next year.

Just this week, the Department of Energy reported that U.S. oil inventories in the strategic petroleum reserve had fallen to the lowest level since 1985 to 469.9 million barrels.

Meanwhile, in some African countries, diesel shortages for drivers are a fact and are leading to various problems. In the Central African Republic, humanitarian organizations have reduced their activities because of the diesel shortage. In Cameroon, drivers have taken to the streets to protest the shortage.

It's not just Africa, either. In Brazil, the state oil company Petrobras warned the government last week that a diesel shortage may be looming over the country unless Petrobras was allowed to sell fuels at market prices.

In Europe, fuel buyers are scrambling to secure supplies of fuels before the embargo on Russian barrels takes effect, which will happen in December, with many admitting it will be tough going into next year.

The United States, meanwhile, needs to balance domestic diesel demand with international demand, which might be a challenge, with diesel and other distillate stocks in decline for much of this year as production has failed to increase substantially.

U.S. diesel demand seasonally increases in the fall as harvest season in the Midwest begins, meaning there may be less diesel for export. This would exacerbate the supply situation in other parts of the world and lead to higher prices even with continued expectations of an economic slowdown.

By Charles Kennedy for Oilprice.com

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