US diesel crack tops $100 as supply disruptions tighten market

Diesel buyers are competing for a shrinking supply pool as the US refining margin tops $100 a barrel for the first time.

The US diesel crack, the premium of diesel futures over West Texas Intermediate crude, hit an all-time high of $102.20 a barrel Monday as wars in Iran and Ukraine cut global refining capacity during peak harvest demand. It traded at $99.82, up 2.4 percent from Friday, and has set intraday records in five of the past six sessions.

"The US is producing more diesel, not less, and yet the crack is still above $100. That tells you this is not a refinery incentive problem anymore — it is a refinery capacity and global replacement-barrel problem," said Shohruh Zukhritdinov, chief executive at oil trading firm NitrolOil.

Global refinery crude throughput averaged 80.9 million barrels a day in July, about 5 million bpd below a year earlier, the International Energy Agency said. US distillate inventories, which include diesel and heating oil, stood at 107.1 million barrels as of Aug. 7, the lowest for that time of year since 1996, Energy Information Administration data show.

The most immediate hit lands on farmers powering tractors and harvesters during the Northern Hemisphere harvest and Southern Hemisphere planting seasons. Longer term, diesel's role in manufacturing, heavy transport and power generation means the squeeze could feed into inflation across the economy into winter.

Supply Disruptions Cut Both Ends of the Barrel

Russia and the Middle East, two of the world's largest diesel suppliers, are both offline at the margin. Middle Eastern exports have been disrupted by shipping through the Strait of Hormuz, while fresh attacks on refineries including Saudi Aramco's Jizan facility added to losses. Russia has banned international diesel sales through January after Ukrainian drone strikes shut plants including the Orsk refinery for up to six months. Russian seaborne oil product exports fell 33.3 percent in July from June and 54.7 percent from a year earlier, industry sources and Reuters calculations show. A second wave of fuel shortages has spread across at least 10 Russian regions, local authorities said.

US refiners have ramped up diesel output to capture the record margins, yet domestic stockpiles keep falling because export demand is pulling barrels overseas. That export pull, combined with the loss of Russian and Middle Eastern supply, has left the Atlantic basin dependent on a thin pool of replacement cargoes just as seasonal demand peaks.

China's Refining Pullback Adds to the Squeeze

US pressure on Iranian exports and threats of penalties on China for buying Iranian crude could tighten the market further. "The US's new policy could make it even harder for China to keep refinery run rates where they are and could make the diesel crisis worse," said Scott Shelton, energy specialist at TP ICAP. China's July crude throughput fell nearly 16 percent from a year earlier, National Bureau of Statistics data show, removing a key source of replacement barrels just as winter heating demand approaches.

The last time US distillate inventories sat this low relative to seasonal norms, in the winter of 1996, heating oil prices spiked as cold weather collided with tight supply. With the Northern Hemisphere heating season roughly two months away and no sign of the wars easing, the risk is that the crack stays elevated through the fourth quarter, pushing diesel costs into trucking, freight and home heating bills. If the Strait of Hormuz remains disrupted and Russian exports stay banned into January, the market faces a winter where diesel scarcity, not crude, becomes the binding constraint on the global economy.

This article is for informational purposes only and does not constitute investment advice.