Diesel markets, fueled by the Middle East conflict, threaten a global recession
Written by Shariq Khan
NEW YORK, March 10 (Reuters) – Rising diesel prices threaten a global recession as war in the Middle East squeezes supplies of both the industrial fuel and the most suitable form of crude oil, traders and analysts said.
Diesel has been struggling for years due to disruptions from Ukraine’s attacks on Russian refineries and Western sanctions on Moscow’s exports. Israel’s war with the US and Iran is exacerbating supply concerns as Tehran disrupts shipping in the Strait of Hormuz, through which between 10% and 20% of seaborne diesel flows.
“Diesel is the most structurally exposed product in this conflict,” said Shohruh Zukhritdinov, founder of Dubai-based Nitrol Trading. “Diesel supports transportation, agriculture, mining and industrial activity, making it a very sensitive barrel in the system.”
The loss of diesel supply associated with the Strait of Hormuz disruption is estimated at 3 to 4 million barrels per day, or about 5% to 12% of global consumption, estimates energy economist Philip Verleger. Another 500,000 bpd of diesel will be lost due to blocked exports from Middle East refiners, he added.
“By closing the Strait (of Hormuz) Iran has cut off the rich export of Distillate Middle East crude, jet fuel, and diesel. There is a word for this in chess: CHECK,” he said.
As a result, diesel prices have risen more rapidly since the start of the Middle East conflict than oil and gasoline, and may nearly double in sales if the Strait of Hormuz is closed for a long time, Verleger said.
US diesel futures have gained more than $28 per barrel from February 27 to March 10, compared to a rise of more than $16 per barrel in US crude oil futures.
Similar measures were registered in the Asian trading hub Singapore and the European hub Amsterdam-Rotterdam-Antwerp, which led to higher diesel margins worldwide.
ECONOMIC WORK IS SET TO DISRUPT
Diesel sticker shock is likely to reverberate through the global economy. If sustained for a long time, the increase in diesel and jet fuel prices will cause demand destruction and economic slowdown, said Sparta Commodities analyst James Noel-Beswick.
“The cost of transporting almost everything is high, which will definitely be reflected in the prices of food and consumers soon enough. If the prices of diesel remain high, the biggest risk is the second wave of inflation,” said Dean Lyulkin, CEO of the US-based small business of Cardiff.
Rising diesel prices could have an immediate impact on food prices by forcing farmers to reduce plantings in the United States just as the season begins.
“The ongoing diesel-led fuel shock may be disruptive in nature because it increases the cost of transporting and producing food and goods while squeezing consumers,” said Shaia Hosseinzadeh, founder of OnyxPoint Global Management.
DIESEL PRICES, GAS SKIP EAST TO WEST
In Asia, among the Middle East’s biggest oil importers, 10ppm sulfur diesel margins stood at about $33 a barrel, about $12 more than before the outbreak of the war, after hitting a three-and-a-half-year high of $48 a barrel on March 4.
In Europe, which is also a key exporter of Middle Eastern refined products, prices for low-sulfur diesel in the Amsterdam-Rotterdam-Antwerp trading hub rose about 55% from February 27 to about $1,165 per ton, Quantum Commodities Intelligence data showed.
Europe, one of the main drivers of diesel prices as a leading consumer, has been largely tied to imports from the Middle East due to efforts to outsource Russia, said Alex Hodes, director of market strategy at StoneX.
“Historically, (diesel) sells for maybe $20-$25/bbl more than crude, but these days we’ve seen margins of $30-$65/bbl and more,” said Tom Kloza, senior adviser to oil producer Gulf Oil.
“Stellar margins for this oil could cover all the debts of the US and foreign refiners.”
(Reporting by Shariq Khan in New York, additional reporting by Trixie Yap in Singapore; Editing by Lincoln Feast.)
