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Diesel fuel is in brief supply as prices surge — Here’s what which means for inflation

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The costs for gas and diesel fuel, over $6.00 a gallon, are displayed at a petroleum station in Los Angeles, March 2, 2022.

Frederic J. Brown | AFP | Getty Images

Diesel prices are surging, contributing to inflationary headwinds as a result of the fuel’s vital role within the American and global economy. Tankers, trains and trucks all run on diesel. The fuel can also be used across industries including farming, manufacturing, metals and mining.

“Diesel is the fuel that powers the economy,” said Patrick De Haan, head of petroleum evaluation at GasBuddy. Higher prices are “definitely going to translate into dearer goods,” he said, since these higher fuel costs shall be passed along to consumers. “Especially on the food market, the ironmongery shop, anywhere you shop.” 

In other words, the impacts shall be felt across the economy.  

Diesel’s surge

The jump in prices comes on the heels of growing demand as economies around the globe get back to business. This, in turn, has pushed inventories to historic lows. Products like diesel, heating oil and jet fuel are often known as “middle distillates,” since they’re made out of the center of the boiling range when oil is become products.

U.S. distillate inventory is now at the bottom level in greater than decade. The move is much more extreme on the East Coast, where stockpiles are at the bottom since 1996. Diesel and jet fuel at Latest York harbor are actually trading well above $200 per barrel, in response to UBS. 

Europe’s move away from dependency on Russian energy is hastening the rapid price appreciation. The bloc currently imports around 700,000 barrels per day of diesel from Russia, in response to Stephen Brennock at brokerage PVM. 

“[T]he tightness in global supply shall be exacerbated by the EU’s proposal to ban Russian oil imports,” he said.  “The ban, if approved, may have an outsized impact on product markets and particularly diesel….There may be now growing anxiety that Europe might run out of diesel.”

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Energy consultancy Rystad echoed this point, saying that the lack of Russian refined products goes to make diesel shortages in Europe “more acute.”

Refiners cannot just ramp up output to satisfy surging demand, and utilization rates are already above 90%. Within the U.S., refining capability has decreased lately. The biggest refining complex on the East Coast — Philadelphia Energy Solutions — shut down following a fireplace in June 2019.

Several refiners are actually being reconfigured to make biofuel, which has also reduced capability.

Some refiners are also undergoing routine maintenance checks that were overdue following the pandemic. These facilities typically run flat out – 24 hours a day, seven days every week – and so sooner or later the machinery must be checked. 

The East Coast relies heavily on other areas of the country for refined products, De Haan said. Now, Europe is competing for these same fuels because it turns away from Russia.

‘Unmoored’ prices

A typical saying in commodity markets is “the cure for top prices is high prices.” But which may not be the case this time around. In line with UBS, distillate demand tends to be less elastic than gasoline prices.

In other words, while high prices on the pump might deter consumers, if a business must get goods from point A to point B, it may pay those higher prices. 

Tom Kloza, head of worldwide energy research at OPIS, said that in years past a barrel of diesel typically sold for $10 above the worth of crude oil. Today, that differential – often known as the crack spread – has surged to a record high above $70.

“It’s turn out to be untethered, unmoored, slightly bit unhinged. These are prices we’re not used to seeing,” he said, adding that there are large price differences across the U.S.

Kloza said diesel at Latest York harbor is now trading around $5 per gallon, while jet fuel prices on the harbor, which normally mirrors diesel prices, are around $6.72. That equates to roughly $282 per barrel.

“These are numbers that usually are not just off the charts. They’re off the partitions, out of the constructing, and possibly out of the solar system,” he said.

Retail diesel prices are also surging. On Friday the national average for a gallon hit a record of $5.51, in response to AAA, after hitting a recent high each day during the last week.

Higher diesel prices is translating to higher profit margins for refiners, who are actually incentivized to make as much as they possibly can. At a certain point, this may lead to tightness within the gasoline market, pushing up the high prices consumers are already seeing on the pump. 

Within the meantime, consumers can expect prices for goods to maintain on climbing.

“It’ll be a double whammy on consumers within the weeks and months ahead as these diesel prices trickle all the way down to the price of products — one other piece of inflation that is going to hit consumers,” GasBuddy’s De Haan said, adding that the complete impact of the recent surge in prices has yet to be felt.

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