According to Bloomberg, this situation was caused by a confluence of several serious problems—a decline in oil supplies, record-high refining margins in the region, and a drop in refinery utilization rates in China.
Analysts at Morgan Stanley, cited by the publication, warn: “The situation is truly tense. Our supply-and-demand modeling indicates that by the end of the year, diesel inventories in Europe will fall to multi-year lows.”
The article notes that this month, global energy markets were shaken by a new outbreak of war between the U.S. and Iran, with prices for petroleum products rising more sharply than those for crude oil itself. The diesel market is tightening due to a number of factors: disruptions in the Strait of Hormuz, Ukrainian strikes on Russian refineries, and Moscow’s ban on diesel exports.
The System’s “Bottleneck”
“The real bottleneck in the oil system right now is refining, to a greater extent than crude oil itself,” note analysts at Morgan Stanley. “The epicenter of all this is the diesel market, and Europe in particular.”
The diesel refining margin in Northwestern Europe, known as the crack spread, has soared to a record high. Local inventories are expected to decline steadily starting in August, reaching a low of about 299 million barrels in November—the lowest level for this time of year since at least 2015.
The situation in China’s industry, where refineries are processing less crude oil, is also contributing to the shortage. “China never ships diesel directly to Europe,” analysts say, “but when China is operating at lower capacity, there is simply less product in the global system that could flow westward.”
Nevertheless, Morgan Stanley warned that the tightness is already reflected in prices and advised investors not to bet on further gains from current levels.
“The market is ‘fully priced—don’t chase it,’” the analysts concluded.
