The diesel crisis is far from over

Despite growing fears of a global economic slowdown, diesel supply remains a concern and the situation could get worse than it is now.

John Kemp of Reuters wrote in its latest oil buying rubric last week that hedge funds and other institutional traders had been buying diesel contracts at the fastest pace since November 2020, adding the equivalent of 9 million barrels to their holdings.

Meanwhile, Bloomberg reported that US diesel demand had reached its highest level in five years, and that it could rise further as we enter the winter. US diesel exports reaches a record high last month, with South America and Europe taking in the most of these exports.

At the same time, India has: imposed restrictions on diesel exports to ensure there is enough for the domestic market. In addition, Russian diesel is being shunned by European buyers due to sanctions, even though the fuel embargo against Russia will not come into effect until the end of the year.

The diesel shortage problem is not exactly new, but it is now receiving a lot of attention.

“Governments have a very clear understanding that there is a clear link between diesel and GDP because almost everything that goes in and out of a factory uses diesel,” a senior executive of the European Petroleum Refiners Association said in March, shortly after the EU began to strike sanctions against Russia.

Russia is the EU’s largest diesel supplier, sending some 750,000 barrels there every day to power its heavy industry, freight transport and a host of other industries that support the bloc’s economy.

But beyond the sanctions, the diesel market seems to have experienced the same as the crude oil market: a much faster recovery in demand than in supply growth.

This demand growth slowed recently, with Kemp reporting last month expectations of a global slowdown amid central bank rate hikes and inflation started to discourage strong diesel demand and led to lower prices, but it appears this was temporary and industrial transportation fuel demand is picking up again up.

In another column, however, the Reuters market analyst noted that US crude oil inventories failed to recover despite fuel price inflation, which meant that fuel market tightness – and high prices – were likely to persist into next year.

Just this week, the Department of Energy reported that US oil reserves in the strategic petroleum reserve cases to the lowest level since 1985 to 469.9 million barrels.

Meanwhile, in some African countries, diesel shortages for drivers are a reality and lead to various problems. In the Central African Republic, humanitarian organizations diminished their activities because of the diesel shortage. In Cameroon drivers have taken took 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 threatens the country unless Petrobras is allowed to sell fuels at market prices.

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

The United States, meanwhile, has to balance domestic diesel demand with international demand, which can be challenging as stocks of diesel and other distillate have been declining for most of this year as production has not increased substantially.

US diesel demand increases seasonally in the fall as the Midwestern harvest season begins, meaning there may be less diesel for export. This would worsen 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

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