Wellington Fuel Station - August 2023
Chart of the Month: Understanding the diesel price surge

Global diesel prices have surged significantly over the last few months. Driven largely by supply constraints, our Chart of the Month shows how this surge has led to a significant import cost premium over petrol. Elevated diesel prices will have ripple effects throughout both the global and local economies, and risk inflation remaining higher for longer.

OPEC’s role

OPEC's surprise cut to crude oil production in April, coupled with extended voluntary cuts by Russia and Saudi Arabia, has exacerbated the situation. These nations produce heavier, sulphur-rich oil preferred for diesel refining. Saudi Arabia's cuts have particularly constrained diesel production, as it had replaced a large proportion of Russian heavy crude following the Ukraine invasion.

Capacity issues intensify pressure

Depleted fuel inventories have also contributed to rising prices, and make the market more vulnerable to shocks. In September, Reuters reported that US distillate inventories (including diesel, petrol, and heating oil) were 16% below their 10-year average, and European inventories were 8% below their 10-year average.

Another challenge arises from the competition between diesel and jet fuel for refinery capacity. Jet fuel demand has grown considerably over 2023 on the back of recovering international air travel. Growth in diesel consumption has been less strong, increasing by around 100,000 barrels a day over 2023, compared with more than one million barrels a day for jet fuel and kerosene.

The slower rebound in diesel consumption has encouraged refineries specialising in heavy crude distillation to prioritise products like jet fuel instead, further dampening the supply of diesel.

Geopolitical risks are a heightened concern

The recent escalation of conflict in the Middle East, with Hamas’ incursions into Israel and retaliatory actions, introduces heightened uncertainty in oil-producing regions. Although Israel isn’t a major player in oil production, the risk of these tensions leading to involvement from Iran and the United States is high.

Although distillate prices have risen across the board due to a constrained supply of crude oil, the unique challenges to diesel production have seen the import cost premium of diesel over petrol rise markedly. The import price of diesel has risen 47% since the start of May, compared to a softer (but still substantial) 24% increase in the import price of petrol. The import cost disparity hit 23c/L at the end of September, and has remained at above 20c/L over October so far – the highest premium on record apart from the massive increase in mid-2022 (following the Russian invasion of Ukraine).

For comparison, the diesel import cost premium over petrol averaged just 1c/L over the five years to December 2019.

An inflationary risk

Although increased non-OPEC crude oil supply and softening global economic growth may offer some relief, prices are expected to continue rising during the remainder of 2023 and into 2024. OPEC production will remain restrained, and any prolonged Middle Eastern conflict will maintain the pressure.

Importantly, higher diesel prices present an additional inflationary risk, with businesses that face higher transport and machinery costs likely to pass at least some of these costs onto consumers.

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