Surging diesel prices are threatening to slow global economic activity as the war in the Middle East pressures supplies of both the industrial fuel and the type of crude oil most suited to produce it, traders and analysts said.
Diesel has been in tight supply for years due to disruptions from Ukrainian attacks on Russian refineries and Western sanctions on Moscow's exports. The Israel-US war with Iran worsens supply worries as Tehran has been disrupting shipping in the Strait of Hormuz, through which between 10 and 20 per cent of global seaborne diesel supplies flow.
"Diesel is the most exposed product to this conflict structurally," Shohruh Zukhritdinov, founder of Dubai-based Nitrol Trading, said. "Diesel underpins freight, agriculture, mining and industrial activity, making it the most macro-sensitive barrel in the system."
The diesel supply loss associated with the Strait of Hormuz disruptions is about three to four million barrels per day, or roughly five to 12 per cent of total global consumption, energy economist Philip Verleger estimated. Another 500,000 bpd of diesel will be lost due to blocked exports from Middle East refiners, he added.
"By shutting the Strait (of Hormuz) Iran has cut the exports of distillate-rich Middle Eastern crude, jet fuel, and diesel. There is a term for this in chess: CHECK," he said.
As a result, diesel prices have risen much faster since the start of the Middle East war compared to oil and gasoline, and could roughly double at the retail level if the Strait of Hormuz is closed for a prolonged time, Verleger said.
US diesel futures had gained more than $28 per barrel from February 27 to March 10, compared with an over $16 per barrel rise in US crude oil futures.
Similar moves have been registered in Asian trading hub Singapore and European hub Amsterdam-Rotterdam-Antwerp, resulting in higher diesel margins across the globe.
The diesel sticker shock is likely to reverberate through the global economy. Sustained for any period of time, diesel and jet fuel price increases will cause demand destruction and slow economic activity, Sparta Commodities analyst James Noel-Beswick said.
"Transport costs for almost everything are up, which will inevitably show up in food and consumer prices soon enough. If diesel prices stay elevated, the biggest risk is a second wave of cost-push inflation," said Dean Lyulkin, Chief Executive Officer of US-based small business lender Cardiff.
The surge in diesel prices could have an immediate impact on food prices by forcing farmers to slow plantings in the United States just as the season gets underway.
"A sustained diesel-led fuel shock can be inherently stagflationary because it raises the cost of moving goods and producing food and commodities while squeezing consumers," said Shaia Hosseinzadeh, founder of OnyxPoint Global Management.
In Asia, among the main importers of Middle Eastern fuel, margins for 10ppm sulfur diesel stood at around $33 a barrel, about $12 higher than before the war broke out, after hitting a three-and-half-year high of $48 a barrel on March 4.
In Europe, also a key importer of Middle Eastern refined products, ultra-low sulfur diesel barge spot prices at the Amsterdam-Rotterdam-Antwerp trading hub have jumped nearly 55 per cent since February 27 to around $1,165 per tonne, Quantum Commodities Intelligence data showed.
Europe, one of the biggest drivers of diesel pricing as a top importer, has been particularly tied to imports from the Middle East due to efforts to wean itself off Russian supply, said Alex Hodes, director of market strategy at StoneX.
"Historically, (diesel) sells for perhaps $20-$25/bbl above crude, but these days we've seen margins of $30-$65/bbl and even higher," said Tom Kloza, senior adviser to fuel supplier Gulf Oil.
"The stellar margins for this fuel can essentially pay all of the bills for US and foreign refiners."
(Reporting by Shariq Khan in New York, additional reporting by Trixie Yap in Singapore; Editing by Lincoln Feast.)