Diesel Crunch Set To Worsen As Refining Capacity Falls Short, Industry Warns

The global diesel market - already trading at record prices - is set to further tighten in the coming months and keep fuel prices high, raising the prices of all goods and threatening the inflation targets of the central banks.

Industry officials, who gathered at the APPEC petroleum conference in Singapore this week, warned that the market has not seen the worst of the diesel crisis yet. Analysts say the real stress in oil markets is in the diesel market right now, OilPrice reported.

Global fuel markets are very tight and inflexible, despite the higher crude oil flows out of the Persian Gulf in recent weeks, Russell Hardy, chief executive of the world's biggest independent oil trader, Vitol Group, said on Tuesday.

“We're still not running enough refining capacity to prevent those draws, and we keep eating into the surplus that exists around the world,” Hardy said at the event, as carried by Bloomberg.

Despite the uptick in flows from the Strait of Hormuz, only 1 million barrels per day (bpd) out of an estimated 10 million bpd outbound flows are refined products, the rest is crude.

Refinery capacity is constrained in the Middle East, due to Iranian strikes on refineries and the trickle of fuel flows through Hormuz.

Moreover, refinery capacity in Russia is also severely restricted by nearly-daily Ukrainian drone strikes at Russian refineries, while Russia has banned diesel exports until at least the end of September.

Refineries in the United States and elsewhere have been running at maximum capacity this summer, having delayed maintenance. But they are unlikely to continue operating at these elevated utilization rates for much longer.

If the global refining system can sustain these processing rates until the end of this year, “it is going to be an achievement,” Shaikh Khaled Ahmad Al Sabah, managing director for international marketing at Kuwait Petroleum Corporation (KPC), told Bloomberg.

“I think we’re going to see a very difficult winter coming in Northwest Europe,” the executive said. “This is only the beginning.”