The U.S. diesel crack surged to an all-time high on Monday, briefly reaching $102.20 a barrel as disruptions tied to the wars in Iran and Ukraine collided with heavy seasonal demand from the agricultural sector.
The benchmark, which measures the premium of U.S. diesel futures over West Texas Intermediate crude futures and is closely watched as an indicator of refining profitability, was trading at $99.82 a barrel as of 11:56 a.m. EDT, up 2.4% from Friday. Intraday records have now been set in five of the past six trading sessions, with new attacks on Middle Eastern refineries adding to already severe concerns over global fuel supplies.
The International Energy Agency reported last week that worldwide refinery crude throughput averaged 80.9 million barrels per day in July, approximately 5 million barrels per day below the level recorded a year earlier.
Farmers are among those facing the most immediate consequences of the soaring diesel market. Diesel is essential for operating tractors, combines and other agricultural machinery, with the Northern Hemisphere currently in harvest season while farmers in the Southern Hemisphere are planting crops.
If the shortage persists, however, the economic consequences could extend far beyond agriculture. Diesel plays an essential role in manufacturing, trucking and other heavy transportation and is also widely used for electricity generation in parts of the world.
Global diesel inventories have already been squeezed by the ongoing conflicts, particularly because Russia and the Middle East are major suppliers. Middle Eastern shipments have been severely disrupted by problems moving cargo through the Strait of Hormuz, while Russia has halted international diesel sales through January following Ukrainian attacks on Russian refineries.
American refiners have responded to the extraordinary margins by increasing diesel output, but domestic inventories continue to fall because of robust demand from overseas buyers, according to Shohruh Zukhritdinov, chief executive of oil trading firm NitrolOil.
U.S. inventories of distillate fuels, a category that includes both diesel and heating oil, stood at 107.1 million barrels as of August 7, according to Energy Information Administration figures released last week. That marked the lowest inventory level for this point in the calendar year since 1996.
“The U.S. 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,” Zukhritdinov said.
Additional pressure could be coming as Washington intensifies its efforts to restrict Iranian energy exports and threatens penalties against China over its purchases of Iranian crude, according to Scott Shelton, an energy specialist at TP ICAP.
“The U.S.’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,” Shelton said in a note to clients.
China is already processing substantially less crude than it was a year ago. Figures released Monday by the National Bureau of Statistics showed that Chinese crude oil throughput in July had fallen nearly 16% compared with the same month last year.
{Matzav.com}
