Diesel prices in the Atlantic basin have become increasingly disconnected from tightening supply and demand conditions, reflecting deepening concerns over the outlook for global economic activity. But when facts on the ground don’t match prices, something has to give.
The market for diesel, a refined fuel used in manufacturing, construction and heavy transport, is often seen as a gauge for industrial activity. And, currently, that gauge is pointing toward a bullish outlook.
First, inventories remain tight in both the United States and Europe. U.S. diesel inventories dropped sharply last week to 115 million barrels and are 6% below their five-year average and 13% below the 10-year average, according to data from the Energy Information Administration.
Similarly, diesel stocks independently held in Europe’s Amsterdam-Rotterdam-Antwerp (ARA) refining hub have declined by 12% since the start of February. While they remain 6% above their five-year average, they are 8.5% below their 10-year average.
At the same time, diesel imports into Europe have sharply slowed so far this year compared with 2024, according to data from shipping analytics firm Kpler.
And supplies have tightened further due to a sharp drop in Russian diesel exports driven by refinery maintenance as well as recent attacks by Ukraine on Russian refineries and energy infrastructure.
While supply has contracted, demand appears robust. In the United States, average four-week product supplied of distillates, a gauge for consumption of diesel and heating oil, reached 4 million barrels per day last week, up 8% from last year and near its five-year average, the EIA data showed.
And in Europe, industrial production across the euro area recovered by 0.8% in January from the previous month, according to initial data from Eurostat, the statistical office of the European Union. This will boost demand for diesel even before factoring in the potential spike in defence and infrastructure investment that could be coming down the pipe.
DIESEL DISCONNECT
Everything about this supply-demand picture points toward rising diesel prices, yet the profit margin refiners make from converting crude oil into diesel has fallen well below the seasonal levels seen in recent years.
Benchmark U.S. diesel refining margins are currently around $25 a barrel, compared with their five-year average of $32 a barrel. A similar picture has emerged in Europe, where northwest European diesel refining margins are some 22% below their five-year average at $16.4 a barrel.
It is usually impossible to identify any one driver of near-term price dynamics in a complex global energy market. But in this case, the key factor is very likely the uncertainty gripping global markets over the economic outlook amid rising trade tensions.
U.S. President Donald Trump’s erratic stop-start rollout of tariffs on goods from major trading partners including China, Canada, Mexico and the European Union in recent weeks has roiled many global markets.
On top of this, the potential for a ceasefire in Ukraine has muddied forecasts in energy markets, as investors attempt to assess the likely impact of any deal on sanctions, European energy policy and geopolitical alliances.
Reflecting this market angst, the Baker Bloom and Davis Index of Trade Policy Uncertainty jumped this year to its highest point since its launch 40 years ago.
The diesel price disconnect suggests that this negative sentiment – the deep uncertainty concerning the direction of global trade and manufacturing – is trumping the reality of tight supply-demand dynamics in the physical market.
While the weakening diesel price may ultimately end up being an accurate signal – if the feared contraction in global economic activity materializes – investors may be getting ahead of themselves.
The fundamental supply and demand picture in the diesel market continues to point toward higher refining margins, so if the facts on the ground do not change soon, prices likely will have to.
Source: Reuters