The diesel market was under pressure from several sides at once
The oil market usually reacts to a reduction in crude oil production. But the current situation is different: the main problem increasingly arises not in oil fields, but in oil refineries and logistics.
The world economy may have access to a certain amount of crude oil, but without refining capacity, this raw material does not turn into diesel, gasoline and aviation fuel.
That is why the shortage of diesel can be much more painful than the usual increase in oil prices.
According to the International Energy Agency, diesel and gas oil form almost 30% of global demand for petroleum products. In early September, US diesel prices topped $200 per barrel, and the European and Asian markets also faced a sharp deterioration in the balance of supply and demand.
1.ExxonMobil shuts down a major Illinois refinery
The first blow fell on the United States.
ExxonMobil shut down its Joliet refinery in Illinois after a power outage. The facility is capable of refining approximately 275 thousand barrels of oil per day and producing approximately 11 million gallons of gasoline and diesel fuel daily.
Initially, a quick recovery of work was expected, but by September 17 the plant was still shut down. Additional problems arose after the flood water damaged the pumping equipment.
For the Midwest market, this is a particularly sensitive factor. The region depends on the stable operation of large refineries, and interruptions in one of the key enterprises can quickly affect fuel reserves and shipping costs.
It is also important that ExxonMobil faced a problem not in an isolated market.American refining facilities are already operating in conditions of high demand for export fuel and limited reserves.
2. Russia is losing its role as a major supplier of diesel
Russia has historically been one of the largest exporters of diesel fuel in the world. But attacks on refining infrastructure have made a big difference.
According to Reuters, in September, unmanned attacks disrupted the work of about half of the largest Russian enterprises producing diesel. Among the affected facilities were the Kirishi, Volgograd and Nizhny Novgorod refineries.In some plants, production was sharply reduced, in others completely stopped.
As a result, Russia was forced to restrict fuel exports to protect the domestic market.
According to the Centre for Research on Energy and Clean Air, Russian oil product export flows have declined sharply, and the country has begun to purchase certain fuels abroad. In August, imports of petroleum products to Russia reached record volumes, with a significant part of gasoline coming from India.
This fundamentally changes the balance of the world market.
Previously, Russia could export diesel to Europe, Turkey, Brazil and other regions. Now some of these flows disappear, and the country itself begins to compete with other importers for affordable fuel.
3. US Discuss Diesel Export Restriction
Against the background of a record increase in domestic prices, Washington is considering limiting the export of American fuel.
The United States is one of the largest exporters of diesel in the world. Restricting supplies abroad could temporarily increase the availability of fuel within the country, but at the same time reduce the volume of supply for the international market.
American politicians are already publicly discussing this possibility. Amid rising diesel prices above $6 per gallon, Senate Majority Leader John Thune said he was open to the idea of temporarily restricting exports.
However, such a measure has a potential side effect.
If U.S. refineries lose some of their export demand, they could reduce capacity utilization.As a result, an attempt to increase domestic supply can lead to a reduction in the total volume of fuel production.
That is, an export ban may not solve the problem, but only redistribute the deficit between countries.
4. Saudi Arabia reduces oil supplies to Europe
The next factor is associated with crude oil.
After the attacks on the oil infrastructure of Saudi Arabia, supplies were disrupted through the key East-West Pipeline, which connects the oil regions of the country with the port of Yanbu on the Red Sea.
According to Reuters, Saudi Aramco has notified some European customers of the cancellation or postponement of September deliveries.The Polish oil company Orlen was forced to urgently look for alternative oil consignments for its refineries in Poland, the Czech Republic and Lithuania.
This is especially important for Europe.
The region is already dependent on imports of petroleum products and is gradually losing its former sources of cheap Russian fuel. If the supply of crude oil from Saudi Arabia is simultaneously reduced, European refiners face a double risk:
less available raw materials;
less capacity to produce diesel within the region.
Aramco itself is looking for diesel and gasoline
The most revealing signal came directly from Saudi Aramco.
According to Bloomberg, Saudi Aramco began looking for diesel fuel in the Mediterranean and showed interest in purchasing gasoline in Europe. The company is also actively looking for alternative routes for crude oil supplies after infrastructure damage in the Red Sea.
This is an important indicator of the state of the market.
When the world's largest oil company begins to look for finished oil products on the foreign market, this suggests that the problem is not only in the price of crude oil. There is a shortage of specific products that cannot be quickly replaced.
Why less oil means less diesel
The link between crude oil and diesel seems obvious, but right now it is becoming central to the market.
The refinery receives the crude oil and splits it into several products:
gasoline;
diesel fuel;
aviation kerosene;
fuel oil;
petrochemical raw materials.
If oil supplies are reduced, refiners cannot simply produce more diesel at will.
Even if the demand for diesel remains the same, the reduced availability of raw materials limits production. And if the refinery fails at the same time, the effect increases several times.
Now the market is faced with just such a combination: a reduction in the production and supply of crude oil, damage to refining capacities and restrictions on international trade.
Why diesel is more dangerous to the economy than gasoline
Gasoline is mainly associated with the costs of car owners. Diesel is the fuel of the entire economy.
It is used by:
freight carriers;
agricultural machinery;
construction equipment;
industrial enterprises;
railway transport;
power generators;
sea vessels;
heating systems in certain regions.
Therefore, the increase in the price of diesel is gradually passing through the entire supply chain.
First, the transportation of goods becomes more expensive. Then the costs of farmers for sowing and harvesting campaigns increase. After that, the costs of warehouses, manufacturers, supermarkets and logistics companies increase.
Food is particularly sensitive.
Farmers use diesel to operate harvesters and tractors, carriers deliver crops for processing, and then trucks deliver finished products to stores.
Reuters notes that record diesel prices are already putting pressure on American farmers during the harvest campaign. The rising cost of fuel increases the costs of producing, storing and transporting food.
Diesel becomes the new inflation shock
The main problem is that the increase in diesel prices can simultaneously affect several components of inflation.
Transport
Carriers raise fares to offset the cost of fuel.
Food
Expenses for the production, cooling, storage and delivery of products are increasing.
Industry
The cost of construction equipment, generators and industrial transport is growing.
Services
Companies are beginning to shift increased operating costs to customers.
Thus, the diesel shock may prove to be more sustainable than the usual jump in gasoline prices.
If oil prices decline due to a drop in demand, gasoline can react quickly enough. But the shortage of diesel is due to limited processing capacity and logistics. Restoration of damaged refineries may take much longer.
The main risk: the market loses its margin of safety
It is especially dangerous that the current deficit is formed in several regions at once.
The US is facing interruptions at the refinery.
Russia is losing part of its export capacity.
Europe is looking for alternative supplies of oil and diesel.
Saudi Arabia is forced to rebuild export routes and is itself looking for additional shipments of petroleum products.
At the same time, the winter season is approaching, when the demand for distillates traditionally increases.International traders are already warning that global diesel supply may remain limited during the winter due to geopolitics, refinery damage and high seasonal demand.
What can make a difference
The market can be relieved if several events occur at the same time:
ExxonMobil will reopen Joliet and other shut-down refineries.
Russian refineries will return to normal loading.
Saudi Aramco will restore damaged export routes.
The United States will not impose strict restrictions on diesel exports.
Geopolitical risks in the Middle East and Eastern Europe will decrease.
In the meantime, each of these factors remains uncertain.
Saudi Aramco is already increasing supplies through alternative routes in Oman, which partially reduces fears about the complete disappearance of Saudi oil from the market.But the high cost of transportation and the lingering risks in the region mean that normalizing shipments could take time.
What traders should track
To assess the further movement of the energy market, it is important to monitor not only Brent and WTI.
The most informative indicators can be:
prices for diesel and gas oil;
distillate reserves in the United States;
refining margin;
loading of American refineries;
russia's export restrictions;
saudi Aramco deliveries;
the cost of sea transportation;
the difference between the prices of crude oil and finished fuel.
The dynamics of crack spread is especially important, that is, the difference between the cost of crude oil and its refined products.
If diesel goes up faster than oil, this signals a shortage of refining capacity and finished fuel.
What this means for oil, the dollar and inflation
The current situation creates an ambiguous picture for financial markets.
On the one hand, the fuel shortage supports the prices of oil and oil products.
On the other hand, too expensive energy begins to reduce consumer and industrial demand. At some point, the economy may move from inflationary pressures to the destruction of demand.
For central banks, this is an extremely inconvenient combination.Rising energy prices support inflation, but at the same time worsen economic activity.
That is why the diesel market can become one of the main macroeconomic indicators for the coming months.
Main conclusion
The global diesel market faced not one problem, but a chain reaction.
The shutdown of a major ExxonMobil refinery, damage to Russian refining capacity, possible U.S. export restrictions, and a reduction in Saudi Aramco's supply are all putting pressure on production, trade, and logistics at the same time.
The most dangerous scenario is that the shortage of finished fuel will begin to spread faster than the market can restore supply.
If this happens, the increase in the cost of diesel will be reflected not only in gas stations. It can increase spending on transport, agriculture, industry and food.
The diesel market is now becoming one of the key sources of risk for global inflation.
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