Global diesel supplies are set to tighten once more, pressured by a Russian export ban and the supply strains stemming from the conflict involving Iran. This will not only increase fuel costs for motorists and farmers but also hinder efforts by various countries to curb inflation.
Russia is the world's second-largest diesel exporter. Even before President Vladimir Putin announced restrictions on diesel exports, global inventories of refined products were already low. The Russian ban effectively acknowledges that Ukraine's long-range drone strikes on Russian refineries have achieved significant results.
As Russia announced the export ban on Wednesday, tensions in the Middle East escalated. Donald Trump declared the US-Iran ceasefire agreement officially void. With the potential for renewed Iranian attacks on shipping lanes in the Strait of Hormuz, the volume of diesel and other refined products shipped out of the Persian Gulf has sharply decreased.
The dual shock to diesel supply has caused a significant spike in European wholesale diesel prices. Traders are scrambling for increasingly scarce supplies, pushing the premium of diesel over crude oil to as high as $60.70 per barrel on Wednesday.
This means that while crude oil prices have recently retreated—from highs above $100 per barrel during the Iran conflict to around $70 currently—diesel is still trading near $135 per barrel. Motorists are not seeing the benefit of lower crude prices reflected in reduced fuel costs at the pump.
Wood Mackenzie's Senior Vice President of Refining, Alan Gelder, stated: "The core question now is: how long will the tight supply last? Fundamentally, after Russia's export ban, total diesel production in the rest of the world cannot meet current demand. The market situation could become quite chaotic."
Diesel is not only fuel for a vast number of vehicles but also an indispensable raw material for agriculture and industrial production. Price increases for diesel ripple through the supply chain to affect the prices of various goods, posing a significant shock to the global economy.
While Donald Trump has expressed satisfaction with lower oil prices ahead of the midterm elections, and most US passenger vehicles run on gasoline rather than diesel, the American public will still feel the knock-on effects of rising diesel costs for farmers and freight trucks.
Amrita Sen of the energy consultancy Energy Aspects noted: "We have warned repeatedly: the refined products market (diesel, etc.) is far tighter than the crude oil market. What people consume in their daily lives are refined products, not crude oil."
Neil Crosby of energy data firm Spata said Russia's export ban could trigger diesel shortages in regions like Africa, Latin America, and Southeast Asia, where purchasing power is generally weaker than in Europe and the US.
Russia typically exports around 700,000 to 800,000 barrels of diesel per day. Following Russia's full-scale invasion of Ukraine in 2022, Europe refused to buy Russian diesel, leading to large volumes being redirected to Brazil and Turkey.
Data from shipping analytics firm Kpler shows Moscow had already been cutting seaborne diesel exports, with June shipments falling to about 260,000 barrels per day, the lowest monthly level in at least a decade.
The decline in June exports followed a previous government order banning independent traders from exporting diesel, compounded by multiple Ukrainian attacks that have damaged all of Russia's major refineries, leaving the industry in deep trouble.
People across Russia are being forced to queue for hours, even days, for fuel. The negative impacts of the four-year conflict are manifesting in a way many Russians have not personally experienced before. Most local motorists fill up with gasoline—the predominant fuel for civilian vehicles in Russia—and the country's regular gasoline production has only a small surplus.
Janis Kluge, a Russia expert at the German Institute for International and Security Affairs, noted that Russia historically produced a large surplus of diesel for export, so there were no obvious signs of a severe domestic shortage before. However, domestic diesel prices have risen about 16% so far this year.
This situation has sparked speculation that Russia's diesel export ban is an attempt to transfer energy pressure to other countries, aiming to force Ukraine's supporting nations to pressure Kyiv to slow its military operations.
Another view is that Russia genuinely faces energy supply problems and needs to retain diesel for domestic industrial production and to fuel heavy transport vehicles heading to the front lines in Ukraine.
Nikhil Dube of energy data analytics firm Kpler said Ukrainian strikes have reduced Russia's refining capacity by 45%. Extensive equipment repairs could take months or even years, with Western sanctions making it difficult for Russia to import sophisticated repair parts.
Janiv Shah of Rystad Energy stated that countries that were consistently buying Russian diesel will now have to compete with Europe for supplies—Europe has been importing diesel to fill the gap left by reduced purchases from Russia and the Middle East.
Shah said: "Looking at the global supply-demand balance, the scale of the shortfall is not small. Countries that were receiving Russian diesel are now competing with Europe for the same pool of available supply."
Data from the US Energy Information Administration shows the US, the world's largest diesel exporter, held distillate inventories (including diesel and heating oil) just above 100 million barrels last week, hitting a 23-year low.
UBS commodity analyst Giovanni Staunovo said: "Once inventories fall below critical levels, domestic US prices will also rise, reducing the profit incentive to export diesel."
Comments