Oil worldwide markets strengthened again this week as new military hostilities between Iran and the US pushed crude to a six week high. The benchmark Brent crude traded in the mid-nineties per barrel while fears over the supply of refined products drove diesel cracks into a historic high. The newest flare-up of the months-long fighting has once again made the Strait of Hormuz a focal point for energy traders, representing a crucial choke point for shipping crude oil and products.
While ministers have, at times, suggested that flows were returning to normal, tanker tracking and industry analysis continues to reveal interruptions to crude oil and middle distillates moving through the strait. Oil prices have been climbing consistently in recent sessions, with the weekly advance marking the strongest since midsummer, more astonishing but was the energy with which the cost of diesel shot up. The “crack spread”, which is the difference between the price of raw crude and the wholesale price of air-cooled diesel which is then refined out of the latter, shot well over one hundred dollars a barrel in some parts of Europe for the first time ever.
In southern Europe, the premium briefly crept over one hundred and four dollars, meaning that diesel was selling at more than twice the price of the crude source material. The margins in northern Europe were also approaching or breaking historic records. All of this reflects a real scarcity of supply.
The combination of these factors has created the squeeze. In reality Middle Eastern exporting countries have seen their exports of refined products decline, that the Middle East is still suffering from ongoing ring-fencing of the continent, that the refinery capacity in Russia has been severely impacted by Ukrainian drone attacks; all has limited the supply of diesel available for the world. The euro zone has been affected the most, having remained dependent on imports for most of the last several years, following the closure of a number of refineries.
Inventories of gasoil and diesel have been drawn down, and the forward structure currently displays severe backwardation, which indicates a high availability of prompt barrels. In the States things are not too different. Diesel prices averaged in the land of the free reached record levels of close to 5 dollars and 82 cents per gallon. surpassing even the highs reached in 2022 following Russia’s invasion of Ukraine. The American diesel crack spread has traded comfortably above 100 dollar per barrel mark. highlighting how tight the middle-distillate complex has become both sides of the Atlantic.
The effect on consumers and business is already apparent. The higher diesel price immediately affects trucks farms ships and public transport. Pump prices of diesel in Europe have risen (compared to gasoline) far more rapidly over recent weeks than is usual in many countries, and this puts more upward pressure on inflation at a time that many central banks are reluctant to ease on.
Refineries still converting crude oil into diesel are making very healthy margins but the system has little excess capacity left that can be called upon rapidly. On top of the geopolitical factors, market analysts believe that the current tightness is also due to structural factors. Demand for oil normally increases during the autumn and winter, and several refineries are due to carry out planned maintenance during the next month or so.