US diesel crack surpasses US$100 a barrel for the first time on supply disruptions

Record Highs

The US diesel crack – the premium of diesel futures over West Texas Intermediate crude – reached an all-time high of $102.20 a barrel on Monday, as reported by both OilPrice.com and the South China Morning Post. By Tuesday, it had eased to around $100, but the crack had already hit new intraday record highs in five of the last six sessions, according to the South China Morning Post.

The record marks the first time the measure has surpassed $100, underlining the severity of the ongoing fuel supply disruptions.

Supply Disruptions

The jump comes amid concurrent wars in the Middle East and Ukraine, both of which have directly impacted refining capacity and fuel supplies. According to the International Energy Agency (IEA), as much as a fifth of Middle East refining capacity – totaling some 9.6 million barrels daily – has been knocked out by hostilities. In addition, Ukrainian drone strikes on Russian refineries have led to fuel shortages and an export ban by Russia, the world's second-largest diesel exporter.

These disruptions have also contributed to a broader decline in refinery throughput. The IEA noted that global refinery crude throughput averaged 80.9 million barrels per day in July, down about 5 million barrels per day from a year ago. For the second quarter, refinery runs were 5.1 million barrels daily below last year's levels, per IEA data.

Global Impact

The effect on the diesel crack is already rippling through economies. In Europe, diesel prices are up 70% from pre-war levels, and for the first time in over a year, diesel costs more than jet fuel, according to data from LSEG reported by Reuters. The US consumer price index rose 3.4% this year, while eurozone prices were up 2.9%, both attributed to higher energy costs.

The most immediate impact is on farmers, who rely on diesel for tractors and harvesters during the northern hemisphere harvest and the southern hemisphere planting season. Longer-term, the price surge could hit manufacturing, heavy transport, and power generation, affecting nearly every sector of the global economy, as reported by the South China Morning Post.

Tight Stocks and Competition

Global diesel stockpiles were already under pressure before the Middle East war began, as warned by analysts at Goldman Sachs. The slowdown in refinery runs has left a demand-supply gap of over 1 million barrels daily, given that global fuel demand fell by some 4 million barrels per day while refining capacity dropped by 5.1 million barrels daily. This has prompted U.S. fuel exports to hit an all-time weekly average of 1.9 million barrels, as U.S. inventory draws create global competition for fuel, Bank of America analysts warned.

"It will get ugly," said Eugene Lindell, head of refined products at consultancy FGE NexantECA, told Bloomberg, suggesting that extremely high flat prices are likely.

Looking Ahead

The outlook for a near-”"solution remains bleak. Even if the Middle East crisis were to pause, the IEA and other analysts believe the squeeze will last for months, as refining capacity isn't expected to recover quickly. With colder weather approaching in the northern hemisphere, diesel demand typically rises, adding another layer of pressure.

Perspectives

EU and US: The consumer price indices in both regions have gone up due to energy costs, and the diesel crack is putting fresh pressure. Governments are under pressure to secure supply and mitigate inflation, though no specific policies are mentioned.

Analysts: Both Goldman Sachs and Bank of America warn that global fuel competition will likely keep diesel prices high. Eugene Lindell of FGE NexantECA expects extreme surpluses in the flat price market.

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