Diesel, a key fuel for transportation and industrial activity, is facing a double whammy of tight supply and high prices in the global market. According to the International Energy Agency (IEA), diesel demand is expected to decline slightly in 2023 due to stubbornly high prices that are fueling inflation and slowing down economies.
The IEA said in its monthly report on Tuesday that diesel markets are already “exceptionally tight” and will become tighter still when the EU embargo on imports of Russian products by sea enters into force in early 2023. The embargo was imposed in response to Russia’s invasion of Ukraine in February this year, which sparked a geopolitical crisis and raised fears of a wider conflict in Europe.
The IEA estimates that the embargo will reduce the availability of Russian diesel exports to Europe by around 300,000 barrels per day (bpd), adding to the existing deficit of 1.2 million bpd in the global diesel market. The agency warned that this could lead to “acute shortages” and “price spikes” in some regions, especially during the winter season when demand for heating oil, a distillate product similar to diesel, increases.
U.S. manufacturing sector contracts for 12th consecutive month
The tightness in the diesel market is also partly due to the closure of 3.5 million bpd of refinery capacity globally since the start of the pandemic, resulting in a net decline of 1 million bpd in diesel production. The IEA said that some of the lost capacity may not return, as refiners face “structural challenges” such as low margins, environmental regulations, and competition from new and more efficient plants.
The IEA also noted that the demand for diesel is closely linked to the performance of the manufacturing sector, which accounts for about 40% of global diesel consumption. However, the manufacturing sector has been struggling to recover from the pandemic-induced slump, as it faces supply chain disruptions, labor shortages, and rising input costs.
According to the latest data from the Institute for Supply Management (ISM), the U.S. manufacturing sector contracted in October for the 12th consecutive month, with the ISM index falling to 48.5 from 49.1 in September. A reading below 50 indicates contraction in the sector. The ISM said that the contraction was driven by a sharp decline in new orders, production, and employment, as well as a surge in prices paid by manufacturers.
The ISM also said that the outlook for the sector remains uncertain, as manufacturers face “significant challenges” in securing raw materials, components, labor, and transportation services. The ISM said that these challenges are likely to persist in the near term, as the global supply chain remains “severely disrupted” by the pandemic, natural disasters, geopolitical tensions, and cyberattacks.
Diesel demand in Europe weakens due to slow industrial activity
The weakness in the U.S. manufacturing sector could signal a lower demand for diesel in the world’s largest economy, which consumes about 20% of global diesel supply. This could help ease some of the pressure on the diesel market, as well as on the U.S. inflation, which hit a 13-year high of 5.4% in September.
However, the diesel demand in Europe, the second-largest consumer of diesel after the U.S., is also weak due to slow industrial activity and high energy prices. The IEA said that the European diesel demand in the third quarter of 2023 was 6.6% lower than the pre-pandemic level in the same period of 2019.
The IEA expects the European diesel demand to remain subdued in the fourth quarter of 2023, as the region faces a “difficult winter” amid rising COVID-19 cases, power shortages, and gas price spikes. The agency said that the diesel demand in Europe could decline by 0.2% in 2023 compared to 2022, while the global diesel demand could drop by 0.1% in the same period.
The IEA said that the slight decline in global diesel demand in 2023 would be the first annual contraction since 2009, when the world was hit by the global financial crisis. The agency said that this reflects the “challenging environment” for the diesel market, which is facing “unprecedented uncertainty” due to the pandemic, the energy transition, and the geopolitical situation.
