Global Refineries Face Uphill Battle to Bridge Diesel Supply Gap
Diesel shortages beset global markets, with prices surging to unprecedented highs, threatening industries and transportation. Refineries struggle to meet demand amid production setbacks and reduced output from major oil-producing nations. Lingering concerns over supply persist, affecting economies worldwide.
Around the world, oil refineries face a grueling challenge in fulfilling the demand for diesel, resulting in a fresh wave of inflation as a fuel that is vital to driving and transportation runs dry.
As oil futures rocket, nearing $95 a barrel in London last Friday (15 September 2023), the rise in diesel far outruns this rally. Thursday saw US prices exceeding $140, an unheard-of high for this time of year. Likewise, Europe experienced a remarkable 60 percent jump in its equivalent since the onset of summer.
The situation could deteriorate. Saudi Arabia and Russia have reduced their output of crude oils with higher diesel content. Both nations, prominent figures in the OPEC+ cartel, disclosed on 5 September that they intend to extend these limitations until the year's end, a phase when the demand for fuel typically increases.
“We’re at risk of seeing continued tightness in the market, especially for distillates, coming into the winter months. Refineries are struggling to keep up,” said Toril Bosoni, head of the oil market division at the International Energy Agency, alluding to the fraction that contains diesel.
Months of inadequate production have created a daunting predicament for international refining facilities. This summer, searing heat in the Northern Hemisphere forced several refineries to operate at a less-than-optimal pace, resulting in impaired stock levels.
There's been increasing pressure on refiners to explore other product complements, such as gasoline and jet fuel, which have experienced a strong resurgence in demand, Callum Bruce, a market analyst at Goldman Sachs, observed.
Other Fuel Options
Furthermore, the pandemic’s affect on demand strained the global refining network to shut down less efficient facilities. Although consumption is recovering, there are no refining plants to fill up the gap.
Optimism lingers for a possible reprieve from diesel scarcity. As the cooler winter months draw near, the weather-related constraints on refineries are anticipated to diminish - even though some are scheduled for routine seasonal servicing.
Bruce remarked, "we think margins have overshot for now”. He stressed that the market orientation and the temporary disruptions in certain refineries could potentially instigate a turnaround.
Nonetheless, concerns persist regarding the availability of diesel from certain vital exporting nations.
China, seen as a potential source of supply relief, has lately announced a revised fuel export cap. However, industry experts and traders in Asia believe that the planned volume may not be adequate to alleviate market tightness by the year’s end. For a significant portion of 2023, the country's deliveries have been mired at levels not seen in the past five years.
Decreased discharges are emerging in essential storage facilities. The US and Singapore’s reserves are presently less than their regular seasonal levels. Stocks in OECD countries are at a lower point than five years ago.
Even in the face of Western sanctions, Russia plays a crucial role as an essential global supplier. They have expressed interest in curbing fuel distribution to international markets.
Restricted supply chains have economic implications. The upswing in US futures can be attributed, at least in part, to truckers swiftly procuring fuel.
“Diesel is the fuel used by the 18-wheeler truck that moves products from factory to market, so when prices spike, those higher transportation costs get passed onto businesses and consumers,” remarked Clay Seigle, director of global oil service at Rapidan Energy Group.
Though there is increasing optimism about the US economy steering clear of a recession, Seigle cautioned that a surge in energy prices, be it in gasoline or diesel, can erode a significant portion of this headway. He said, “this risk is not lost on anyone in Washington as the election campaign season approaches”.
He observed that the steep surge in diesel prices might lead refineries to concentrate on fuel production at the expense of gasoline.
The outlook for diesel could have been grimmer, as its consumption growth hasn't been as strong as in other barrel segments.
The IEA's report for the month, released last week, anticipated a growth in consumption of about 100,000 barrels daily for 2023. In comparison, gasoline logs nearly 500,000 barrels in daily consumption, and jet fuel and kerosene exceed a million barrels each day.
According to the head of refined products at FGE, Eugene Lindell: “It’s a supply issue at heart. European refineries were also unable to build up supplies over the summer because of widespread unplanned outages which has left inventories tight ahead of winter.”