Yves here. We’ve been warning for months about a coming diesel shortage. Now it is on the verge of materializing. Even though, in the US, this outcome is partly the result of limited refinery capacity (due to underinvestment in the face of more stringent environmental requirements), sanctions blowback is another contributor. Russian crude is heavier than US or Saudi and is particularly well suited for the production of diesel and heating oil; that’s the reason so many European passenger cars run on diesel. Remember when Biden went begging to Venezuela? Venezuela crude is heavy and sour. It would have taken some refinery tuning, but it could have been mixed with sweeter crude to produce diesel and heating fuels.

China relenting on its Zero Covid regime is likely to increase demand for oil and gas. Having said that, in the US, there have been signs of lower consumer demand for shipments, which ought to translate into lower trucking levels. But Christmas is still night, so it isn’t clear that the offset of (perhaps) less robust retail demand will alleviate the diesel squeeze. From CNBC in October:

A big decline in warehouse orders leaving storage and heading to retailers is another signal of the pullback in consumer demand.

According to the latest data from WarehouseQuote, outbound orders from customers shipping to retailers is down by one-third (-33%) year over year.

Jordan Brunk, CMO of WarehouseQuote, said with fewer products being moved out of warehouses to go into stores there will be less warehouse space available for incoming orders.

The fact that supplies are getting tighter, however, does not yet give a clue as to how bad price increases might get to be. Ultimately, high enough prices serve as a rationing device, even if that come in the form of colder home. But if and when diesel prices rise, they will also show up in higher shipping and therefore end goods costs. Given the rapid inventory turnover, consumers will likely see the impact in grocery prices.

By Tsvetana Paraskova, a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. Originally published at OilPrice

U.S. distillate stocks, which include diesel and heating oil, have slumped to their lowest level for this time of the year since 1951, just as the heating season starts and the EU embargo on Russian oil product imports kicks in in February.

Despite a small build in America’s distillate inventories last week, the levels are still at their lowest level since 1951, according to Financial Times estimates.

The historically low stocks have pushed diesel prices much higher than the smaller rises in gasoline and crude oil this year. Since diesel is the primary fuel of the economy and long-haul transportation, the high diesel prices continue to fuel inflation.

In the week ending November 11, distillate fuel inventories increased by 1.1 million barrels and are about 15% below the five-year average for this time of year, the EIA said in its weekly inventory report on Wednesday. At 107.4 million barrels, those stocks are the lowest ever seen for this season of the year.

“The bulk of the increase in distillate stocks was on the US East Coast. And while this is helpful, stocks in the region are still at their lowest levels on record for this time of year,” ING strategists said on Thursday, commenting on the EIA inventory data.

Very low diesel stockpiles and lower refining capacity since the pandemic have driven diesel prices in the United States higher to the point of reaching a record-high premium over gasoline and crude oil.

Going forward, the supply of diesel in the U.S. and globally is set to tighten even further with the EU embargoes on imports of Russian crude and products, starting in December and February, respectively.

“The competition for non-Russian diesel barrels will be fierce, with EU countries having to bid cargoes from the US, Middle East and India away from their traditional buyers,” International Energy Agency (IEA) said in its monthly report earlier this week.

“Increased refinery capacity will eventually help ease diesel tensions. However, until then, if prices go too high, further demand destruction may be inevitable for the market imbalances to clear,” said the agency, which sees stubbornly high diesel prices fueling inflation as well as slowing economies leading to a slight decline in global diesel demand in 2023.

This entry was posted in Economic fundamentals, Energy markets, Guest Post, Income disparity on by Yves Smith.