Russian Refinery Shutdowns Raise Diesel Crunch Fears as Prices Jump 28.7%

Global diesel prices jump 28.7%

Russia bans exports after Ukrainian drone strikes

European heat wave and holiday travel lift demand

China, US expand exports to fill gap

South Korea misses out because of curbs

Global diesel prices are swinging again as Ukrainian drone strikes force widespread shutdowns at Russian refineries. Russia, the world's second-largest diesel exporter, has seen refining facilities knocked offline, tightening supply. With Middle East tensions and seasonal peak demand adding pressure, Europe is at the center of an intensifying scramble for cargoes. Some in the market are warning that a diesel crunch could follow June's jet-fuel shortage.

Supply disruption fears take hold

According to Korea National Oil Corp., diesel prices in South Korea stood at $148.54 a barrel on July 17, up 28.7% from $115.44 a month earlier. Prices had surged to $292.8 a barrel in April on the fallout from the Middle East war, then fell back to around $110 in early July on hopes for a ceasefire agreement. That decline proved short-lived, with prices turning higher again in mid-July.

Industry officials say concerns over the global oil-products supply chain are driving the rebound. Tensions in the Strait of Hormuz have eased, allowing crude flows to recover, but capacity to refine that crude has tightened. JPMorgan said in a recent report that global refined-fuel output has fallen about 10% from levels seen before the Middle East war began.

Russia's export controls have delivered the biggest blow to diesel supply. The country had been exporting about 800,000 barrels a day, or 12% of global export volumes, before Ukrainian drone attacks hit at least 19 refining facilities over the past two months. Russia's government ultimately imposed a full ban on diesel exports on July 9, citing the need to secure domestic supply.

The market is increasingly bracing for a repeat of the jet-fuel crunch that surfaced earlier this year. At that time, Russia halted jet-fuel exports through year-end, triggering a global race to secure supply. Australia and New Zealand sought South Korean cargoes, creating a seller's market where suppliers could effectively name their price.

Demand is running hot; South Korea is constrained by regulation

Demand is rising as supply shrinks. July and August are typically the peak season for diesel consumption as summer holiday travel boosts road traffic across the Northern Hemisphere. An unusual heat wave across Europe, which remains heavily reliant on Russian energy, is also deepening signs of fuel tightness.

Competing exporters are moving quickly to fill the gap left by Russia. China resumed exports of jet fuel, diesel and gasoline in May. The US is also increasing shipments to Europe even as domestic middle-distillate inventories fall to their lowest levels in years.

South Korean refiners, by contrast, are unable to capitalize on the opportunity. The country's diesel exports totaled 12.7 million barrels as of May, down 27.9% from a year earlier. The government has limited petroleum-product exports to roughly last year's levels to prevent excessive domestic supply from flowing overseas. An official at one refiner said the company has received diesel supply inquiries from Europe but has had to turn them away because of export restrictions.

Ahn Si-wook, Hankyung.com reporter siook95@hankyung.com