The peak demand in winter will push up the price of diesel
Insufficient spare refining capacity, restricted Russian oil exports, and geopolitical disturbances have led to the continuous depletion of global diesel inventories. As the winter season approaches, there is an expectation of a shortage of supply in diesel futures trading.
The global diesel fundamentals continue to tighten.
Industry executives at the APPEC conference sent out signals that the global diesel market is about to enter a prolonged period of tightness. On one hand, the refining industry has almost no idle spare capacity. On the other hand, the Russian oil export ban, coupled with the peak diesel demand from winter heating and transportation, have pushed up diesel prices. The conflict in Ukraine and the situation in the Middle East have disrupted the supply chain of crude oil and refined oil. The operation of refining facilities in Russia and the Middle East has been affected, with crude oil exports restricted. The supply of crude oil in the Asian region has decreased.
The diesel crack spreads in Europe and the U.S. have continued to rise, and the refining profits have reached new highs. These data are key signals tracked by diesel futures traders. Currently, there is a daily shortfall of about 2 million barrels of Russian crude oil in the market, and there is also a supply gap of nearly 2 million barrels in the Middle East. The Middle East still exports 9 million barrels of crude oil per day, but only 1 million barrels of refined oil. Crude oil can be redistributed across regions, but the gap in refined oil supply is unlikely to be quickly filled in the short term.
The refineries are operating at full capacity, and the cracking spread has reached an all-time high.
Most refineries in the U.S. are already running at full capacity and there is very little spare capacity left. Refineries can not just suddenly increase diesel production by operating their refineries harder. If the demand for winter diesel suddenly surges, the market will have to rely on consuming inventories or raising prices to curb consumption. The futures market for refined oil products often uses the cracking spread to measure the profit of oil refining enterprises in processing crude oil to produce refined oil. The diesel cracking spread recently hit a new intraday record high of $108.02 a barrel.
The increased cracking spread suggests a higher premium of diesel over crude oil. Refineries will prioritize the production of diesel and try to increase the proportion of diesel output as much as possible, reducing the production of other oil products such as gasoline. However, this adjustment has an upper limit. The process equipment is fixed, and the product structure can not be adjusted indefinitely within a short period of time. Even if all refineries switch to producing more diesel, the additional supply will still be limited. The spot diesel price in the U.S. reached a historical high last week.
High-priced fuels curb demand, global crude oil demand is expected to be reduced.
The supply side is tight, and high-priced diesel will counteract terminal consumption. Industry executives said the high fuel prices will knock 1.5 million barrels off the global average daily oil demand in 2026 compared with 2025. Diesel has a wide range of applications. In winter, Europe and North America use diesel for heating. Sea transportation and construction machinery consume a large amount of diesel. The rising prices will force enterprises to reduce diesel purchases. The reduction in demand will to some extent alleviate the supply gap and limit the upward potential of diesel futures. However, the adjustment speed of demand is very slow.
Changes in China's crude oil imports affect the global rebalancing of refined oil products.
Between 2025 and 2026, China's crude oil imports will be 5 to 6 million barrels different. This gap level is difficult to sustain for a long time. It is expected that by the end of the year, China's crude oil import volume will gradually recover, and domestic production can meet the fuel demand during the winter. China is an important refining base in the world. A large amount of crude oil enters domestic refineries for processing, producing diesel and gasoline. Some is supplied to the domestic market, and some is exported to regions such as Southeast Asia.
If China's crude oil imports increase, the domestic refineries will raise their operating rates, and the volume of refined oil exports is expected to increase. This can replenish the supply in the global diesel market and alleviate the supply pressure in overseas regions. The opening of China's refined oil export window will become an important logic for short sellers. However, there is a time lag from importing crude oil to processing, producing diesel, loading and shipping for export. In the short term, it is difficult to immediately fill the diesel gap in the European and American markets.