Diesel Market Faces Crisis Amidst Shortage of Crucial Crude Oil
Our articles may contain affiliate linksThe diesel market is currently facing a crisis, which may worsen due to a shortage of the specific type of crude oil used to produce diesel. Output restrictions imposed by countries like Saudi Arabia and Russia are limiting the availability of medium and heavy crudes, pushing refiners to explore alternative options. This shift is reducing the production of diesel fuels, including heating oil, in an already tight market, just as winter approaches.
Wood Mackenzie Ltd. predicts that the proportion of diesel produced by refiners will drop by 1.5% in the next quarter compared to the previous year. This reduction translates to a loss of approximately 1.2 million barrels per day, equivalent to the combined output of Germany and the U.K. Even increased overall processing rates won't fully compensate for this loss.
The diesel market has been showing signs of scarcity for some time, with diesel prices relative to crude oil well above seasonal averages in regions like northwest Europe, the U.S., and Asia. Lower refining yields, partly due to plant outages, have contributed to this scarcity.
OPEC+ cuts have encouraged refiners to process lower-density crude, resulting in a lower output of diesel-type fuels. Additionally, plant production has been shifting toward other products. For instance, increased demand for jet fuel during the summer led to decreased diesel yields. A tight gasoline market in the Atlantic basin also diverted production away from diesel.
The expected drop in diesel yield in the fourth quarter is significant because it's typically a time when plants increase their relative diesel output to meet winter heating demand. However, this year, factors like OPEC+ crude cuts and a focus on jet fuel production make it challenging to achieve higher diesel production.
Despite an anticipated increase in crude oil processing by refineries in the next quarter compared to the previous year, this won't be sufficient to compensate for the reduced diesel supply resulting from lower yields, as projected by Wood Mackenzie. Overall, the supply of diesel-type fuel is expected to decline by 400,000 barrels per day, a quantity larger than France's total output.
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Highlights of the article
Diesel Market in Crisis: The diesel market is currently grappling with a crisis due to a shortage of critical crude oil.
Output Constraints: Output curbs imposed by major oil-producing countries, including Saudi Arabia and Russia, are limiting the availability of medium and heavy crudes, pushing refiners to seek alternative sources.
Reduced Diesel Production: As a result of this shift, the production of diesel fuels, including heating oil, is decreasing in an already tight market, particularly as the winter season approaches.
Wood Mackenzie's Projections: Wood Mackenzie Ltd. predicts a 1.5% drop in the proportion of diesel produced by refiners in the upcoming quarter compared to the previous year. This reduction translates to a substantial loss of daily diesel production.
Signs of Scarcity: Signs of diesel scarcity have been evident for a while, with diesel prices relative to crude oil significantly exceeding seasonal averages in key regions.
Multiple Contributing Factors: Lower refining yields, driven in part by plant outages, have played a role in exacerbating the scarcity of diesel-type fuels.
Shifting Production Focus: Refineries have been redirecting their production focus away from diesel due to factors such as increased demand for jet fuel during the summer and a tight gasoline market in the Atlantic basin.
Challenges in Meeting Winter Demand: The anticipated drop in diesel yield in the fourth quarter is of particular concern, as it's a time when plants traditionally increase diesel production to meet heightened winter heating demand. However, this year presents challenges due to OPEC+ crude cuts and a stronger emphasis on jet fuel production.
Insufficient Compensation: Despite an expected increase in crude oil processing by refineries, it is unlikely to fully compensate for the reduced diesel supply resulting from lower yields, leading to an overall decline in the supply of diesel-type fuel.
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