A refinery in Linden, NJ (Bing Guan/Bloomberg)
key takeaways:
- U.S. refiners boosted diesel output to 5.3 million barrels per day in July, boosting output for a record month outside the winter.
- The increase reflects a reduction in global supply driven by the Russia and Iran wars, strong exports and concerns about disruptions through the Strait of Hormuz.
- Analysts expect the diesel market to strengthen further as refinery maintenance season approaches, while low U.S. inventories pose a threat to higher winter prices.
U.S. refineries are boosting diesel output to near-record levels in keeping with seasonal trends as the Russia and Iran wars create a global supply crisis.
Refiners have produced an average of 5.3 million barrels of distillate fuel oil — primarily diesel — each day this month, according to U.S. Energy Department data. If this pace continues, it would be the highest diesel production ever in the US in the month of July, and one of the highest such months on record outside of the winter heating season.
Diesel production typically peaks toward the end of the year as cooler weather sets in and global demand for heating oil, part of the distillate pool, increases.
However, this year, refiners are ramping up production several months ahead of schedule due to a severe global supply shortage. Renewed fighting in the Middle East threatens to once again disrupt shipments through the Strait of Hormuz, while Russia has banned most fuel exports after months of Ukrainian drone attacks on its refineries.
Even with greater production, competition for supply increases. The US is on track for a record second-highest export of distillate fuel in July – followed only by the summer of 2022 – as countries from South America to Europe suddenly scramble for supply.
That’s providing little relief domestically as U.S. stockpiles are already well below midsummer average levels, raising the possibility that supplies could be tight in the cooler months of the fall and diesel prices at the pump will be higher.
Diesel, the main horse of the global economy, is back above $5 a gallon at retail levels after plunging during the short-lived US-Iran ceasefire. Gasoline prices at the pump have soared above $4 a gallon, reigniting concerns about inflation and creating political headwinds for President Donald Trump ahead of the midterm elections in November.
Profit margins on converting crude oil into diesel have already reached the highest levels in the US and northwestern Europe.
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Analysts expect more tightening, especially as weather risks loom in the US and the global refinery maintenance season approaches.
“September marks a major period of global change,” said James Noel-Beswick, head of commodities at Sparta Commodities. “Will we build up sufficient diesel stocks before then and before the winter of the first quarter of 2027? That seems extremely unlikely.”
On July 22, US diesel futures were trading near $4.10 a gallon, while European diesel prices were trading near $1,224 a ton, both at their highest levels in nearly two months.
