Worsening diesel shortages in the United States and around the world are adding to the upward pressure on petroleum prices threatening to recreate the conditions that led to the 2008 price spike. According to high-frequency data from the United States Energy Information (EIA) distillate fuel oil inventories which include diesel fell by 2 million barrels in mid-March of this year to 112 million barrels.
“Distillate stocks have declined in 52 of the last 79 weeks by a total of 67 million barrels and are at the lowest for the time of year since 2014 and before that 2008 (“Weekly petroleum status report” EIA March 23).” If stocks follow seasonal patterns over the last ten years inventories are expected to fall to 104 million barrels by the middle of the year making them as tight as they were in 2008.
“In the reasonable worst case scenario however stocks could deplete to as little as 93 million barrels which would be critically low and lead to explosive upward pressure on prices.” Similar distillate shortages have emerged in Europeand Asia as the rapid recovery in consumption following the pandemic has outpaced increased crude oil output and diesel refinery production.
According to Reuters “Over the next months diesel output needs to accelerate significantly consumption growth must slow and the market must avoid a significant loss of Russian exports. If that is not possible the result is likely to be a severe price spike which will enforce a reduction in consumption through a business cycle slowdown.”
Europe’s distillate stocks had already dropped to their lowest seasonal level since 2008. Singapore’s stocks are at their lowest seasonal level since 2006.
Middle distillates such as diesel and gas oil are primarily used in freight transport manufacturing farming mining and oil and gas extraction making them the oil industry’s most cyclically sensitive sector.As in 2007/2008 synchronized global expansion in North America Europe and Asia has resulted in an acute shortage.
Reuters reports that “Global airlines are grappling with a double whammy from the rare combination of a strong U.S. dollar and high oil prices at a time when broad inflationary pressures and worker shortages are also placing pressure on the pandemic-hit industry’s recovery.”
As a result distillate prices are driving the entire oil market higher with upward pressure on diesel prices spilling over into the adjacent gasoline market and the upstream crude market.
The media is now warning that we are on the same cusp of diesel rationing. The Business Insider reports that according to analysts the diesel market is in its worst crisis since the 1970s. Much of the economy is powered by commodity which includes big-rig trucks farm equipment and industrial machinery. In May prices in the United States reached a new high of $5.56 per gallon up 76.5% from a year ago.
“The markets are telling us there’s a shortage ” Jim Mitchell Refinitiv’shead of Americas oil analysts told Insider.“This is a tailwind for inflation. We’re demanding more diesel than anyone can supply.” He added that diesel now costs so much that it is hitting demand which he called“price rationing” which could help ease prices.“But unfortunately that also corresponds with heading into a recession.”
Everything seems to be in shortage these days….
Sky News also reported that the British government has also ordered an “urgent” review by the competition regulator into the fuel market after pump prices hit new record highs. This intervention came after the average cost of filling a typical car with petrol surpassed £100 last week adding to the cost of living squeeze for households already dealing with rising energy and food costs. The invasion of Ukraine by Russia a major oil producer drove up the price of Brent crude to more than $130 per barrel.
Considering the above information will Europe experience a diesel shortage with further repercussions like raising the price of oil?