The war in Iran and the intensifying Black Sea fight between Russia and Ukraine have put the spotlight back on crude oil, but it’s diesel prices that are poised to create pain on the farm while ringing alarm bells across financial markets about the potential for resurgent inflation pressure.
September U.S. diesel futures have surged over 30% from the late June low set after the U.S. and Iran signed a Memorandum of Understanding setting up talks to end the war. That compares with a 16.5% rise in Nymex WTI crude oil futures off its early July low.
Diesel is simply in short supply. That’s exemplified by the heating oil crack spread, noted Alex Hodes, director of energy market strategy at StoneX, in a YouTube video. The spread is the profit refiners see from turning crude into heating oil or diesel fuel and is trading in the $85 range. That’s way beyond seasonal averages and close to historical highs, Hodes said, signaling the market is “very tight on diesel relative to crude.”
How tight? Global diesel and gasoil loadings are on track to fall to a nine-year low in July, said Bridget Payne, head of energy forecasting at Oxford Economics, averaging 5.2 million barrels per day (bpd) in the first 10 days of the month, around 32% below the 7 million bpd average in the three months before the Iran conflict.
Payne, in a research note, observed that Russia normally exports nearly half of the diesel it produces and accounts for around 12% of global diesel exports, making it the world’s second-largest supplier after the U.S. That means the impact of the country’s ban on diesel exports extends well beyond its traditional customers.
“Although Europe and the U.S. no longer directly import Russian fuel, removing these cargoes forces buyers such as Brazil and Turkey to compete with Europe and other importers for alternative supplies, particularly from the U.S., pushing prices higher across regions,” she wrote.
Russia’s export ban is due to expire at the end of July, but an extension appears increasingly likely while attacks on Russian refineries continue and the country continues to deal with domestic fuel shortages, Payne said, observing that once restrictions are lifted, damage to refining infrastructure could take months to repair.
Ukraine’s attacks on Russian energy infrastructure has taken around 4 million bpd of Russian refinery capacity offline, estimated Christopher Louney, an analyst at RBC Capital Markets, in a recent note. Refinery intake in June fell to its lowest level in the firm’s dataset at around 3.43 mBD – a drop of around 500,000 bpd.
Pressure on Russian fuel exports comes with global inventories sitting below the 5-year average for gasoline, diesel, and jet fuel, while gasoline and diesel hover around the bottom of the 5-year range, Louney said.
Diesel and other fuel supplies were running tight relative to crude before the latest turns in the Russia-Ukraine war or the re-escalation of hostilities in the Middle East. That’s where the shutdown of the Strait of Hormuz caused a particular pinch, halting flows of heavy, sour Middle Eastern crude, which is particularly well suited to producing middle distillates, and by restrictions on Chinese fuel exports, Payne noted. She observed that Persian Gulf refinery throughput has fallen by around 30%, while refined products – unlike crude – can’t bypass the Strait through alternative pipelines. Attacks on refineries in both the Gulf and Russia have compounded the disruption, she said, with around 10% of global refining capacity reportedly offline.
Hodes at StoneX said Asia may feel the crunch first as buyers rush in to secure hearing fuel, then progressing across Europe. The U.S., as a diesel exporter, might not be constrained from a pure supply standpoint, he said, but will see further upward pressure on prices as export demand increases.
The tight diesel supplies come as farmers continue to feel the pinch from high input prices from fuel to fertilizer and other essentials. The latest Purdue-CME Ag Economy Barometer showed a further drop in farmer sentiment in June, driven by high input costs. Concerns were also reflected in an American Farm Bureau Federation study released this week that warned producers growing nine principal crops are set to lose $32 billion in 2027 without federal assistance, compared to $31 billion in 2026 – with every crop analyzed expected to remain below breakeven next year.
While the pain from fuel costs is acute for producers, rising prices also matter through the biofuel channel. Corn and soybean oils are increasingly influenced by gasoline and diesel economics through ethanol and renewable diesel production, noted Ole Hansen, head of commodity research at Saxo Bank, in a note. “A prolonged period of elevated fuel prices could therefore strengthen demand for selected agricultural feedstocks,” he said.
For the broader economy, higher diesel prices tend to stoke worries about inflation, perhaps blunting any relief from cooler-than-expected June consumer price index and producer price index readings.
“The macroeconomic risk comes primarily through diesel, given its central role in freight, agriculture, and industry, although gasoline is also important, particularly in the U.S.,” Payne said. “Higher fuel prices feed rapidly into transport, production, and distribution costs and, ultimately, broader consumer prices.”