Diesel’s Supply Crunch Leaves Market Crying Out for Barrels

The world’s biggest oil product market is hungry for barrels as traders grapple with a summer supply squeeze.

US stockpiles of diesel products have dropped to the lowest for the time of year since 1996, while in Europe benchmark futures are signaling a tighter market than during the height of the Israel-Iran conflict. The cost of the fuel relative to crude — a key trading metric known as the crack — is well above seasonal norms in both regions.

The pressure on supplies has been driven by refinery closures on both sides of the Atlantic and a slew of recent outages, as well as the impact of production curbs by key OPEC+ producers. Last month, diesel accounted for just 31.4% of global output of oil products, well below the seasonal average, according to figures from Energy Aspects Ltd.

The shortage is driving up prices for diesel, used in everything from construction to transport to heating. In northwest Europe, the premium for more immediate supplies over the following month surged to $44 a ton on Friday; excluding the often volatile days when futures contracts expire, that’s the strongest since late-2022.

“The Atlantic Basin diesel balance is looking increasingly tight into autumn refinery maintenance season and peak winter demand,” said Natalia Losada, an oil products analyst at Energy Aspects. “European inventories may not build in July, which leaves them in a very fragile position.”

Diesel markets spiked last month when the fighting between Israel and Iran threatened millions of barrels of fuel exports from the Persian Gulf. That risk has now receded, but supplies remain under pressure.

The biggest of the OPEC+ output cuts came from Saudi Arabia and Russia, both of which pump crude at the heavier end of the spectrum. Meanwhile, Kazakhstan boosted output of its very light Tengiz crude earlier this year.

“OPEC+ cuts have been making crude slates lighter — refiners produce less diesel with light crude,” said James Noel-Beswick, an analyst at Sparta Commodities. Cracks need to rise “to incentivize refiners to make more diesel,” he added.

In the US, diesel yields and stockpiles are expected to remain low in July, as a rebound in Canadian crude exports to the country is only seen in mid-to-late third quarter, according to a June 30 report from consultancy FGE NexantECA. For Europe, the tightness of medium/heavy grades could last longer. 

To be sure, increases in OPEC+ oil production — set to be even faster than expected next month — should offer some support for diesel supply. Healthy refining margins should also encourage plants to run hard.

But there are also risks. Summer heat waves can pressure production, while the North Atlantic hurricane season is a potential danger for US output of diesel and other fuels.

The prompt spread for diesel futures getting wider in Europe — and very high premiums for physical barges — underscore the tightness in the Amsterdam-Rotterdam-Antwerp oil trading hub, said George Shaw, an oil analyst at Kpler.

“With less volume coming into ARA, stocks are not getting a chance to significantly replenish,” said Shaw.

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