The recent rise in crude oil flows out of the Strait of Hormuz isn’t solving the world’s most pressing fuel problem—the diesel crunch and record diesel prices that start to feed into the wider economy.
While Middle East crude oil flows are nearing pre-war levels, global diesel supply is much lower due to refinery constraints in the Middle East and Russia that the rest of the world cannot offset.
The diesel squeeze hiked wholesale and retail prices to record highs in the middle of September as the market realized that crude oil supply does not equal refined product supply, and demand for middle distillates started rising seasonally from agriculture, road freight, and the coming winter.
There isn’t an easy fix to the crunch, neither the G7’s promised release of 100 million barrels of oil, including diesel, nor the controversial Trump-Putin deal for the U.S. to buy Russian diesel.
The global diesel squeeze will end when markets return to some kind of normality, which is months away, at best, and certainly not before the U.S. midterm elections on November 3.
Diesel Tightness To Extend into 2027, IEA Says
The current crunch in the diesel and gasoil markets is set to extend into the middle of next year, the International Energy Agency (IEA) said in its monthly Oil Market Report published this week.
Counter-seasonally, gasoil and diesel markets tightened in the third quarter of 2026, amid prolonged disruptions in refinery operations in the Middle East and Russia, the agency noted.
“Combined with much heavier-than-normal inventory declines in 2Q26, this has deprived global gasoil markets of crucial stock cover ahead of the peak winter demand season,” the IEA said.
But the relatively price-inelastic diesel demand has remained strong, supported by government measures aimed at easing the impact of high prices on consumers, according to the agency.
“Falling inventories, soaring cracks, and steepening levels of backwardation have signalled the need for additional supplies,” the IEA said.
Even if refinery throughput recovers rapidly into the end of this year, gasoil supply will fall short of meeting demand this quarter, “suggesting that the replenishment of lost inventories, outside of typical seasonal fluctuations, is unlikely before 2H27.”
Global diesel exports fell by 700,000 barrels per day (bpd) in September from a year earlier, as a 1.3-million-bpd loss from Russia and the Middle East was only partly offset by higher supply from other sources, the IEA has estimated.
“As the Iran war manifests itself through restricted product availability, soaring fuel prices and a deteriorating economic outlook, diesel will register 25%” of the expected 2.6 million bpd decline in global oil demand this year, the agency noted.
Global diesel prices have eased from the all-time highs of more than $200 a barrel reached in September, but diesel benchmarks remain nearly double the price of crude oil and their pre-crisis levels, the IEA said.
Crude Oil Supply Doesn’t Mean Diesel Supply
While growing volumes of crude oil have moved out of the Persian Gulf and the Middle East in recent weeks, the barrels come at a high cost and high risk, Ole Hansen, Head of Commodity Strategy at Saxo Bank, wrote in an analysis this week.
“Depleted inventories, elevated freight costs and persistent geopolitical risks explain why crude prices have remained stubbornly high despite improving physical flows,” Hansen said.
The diesel market, however, is a whole new ball game. Additional crude oil exports cannot ease the reduced refinery output in the Middle East, which was a major diesel and jet fuel supplier before the war.
“The clearest evidence that the market remains far from normal is the continued strength in refined products, particularly diesel.”
Both U.S. ultra-low sulfur diesel (ULSD) and European gasoil futures moved back to trade above $200 per barrel equivalent this week, “reflecting a shortage that additional crude exports alone cannot resolve,” the strategist said.
This shortage cannot be solved with high crude oil exports. The global energy system needs normalization in all major supply chain components from production to transportation and refining for prices to ease. The oil crisis has now turned into a shipping crisis and a refining bottleneck, which add to the supply squeeze in products and to inflation pressures.
Economic Spillover
“Record diesel prices are already having broad economic consequences by raising the cost of goods and impacting real incomes, economic activity, and inflation,” the IEA warned in its report.
The diesel price shock is extending from transport through supply chains, analysts at Oxford Economics said earlier this month.
Some of the costs transferred to customers have started to emerge in the U.S. This year has seen a renewed surge in operating-cost pressures for U.S. trucking, driven overwhelmingly by diesel, while freight trucking producer prices have also begun to rise, Oxford Economics says.
“This suggests carriers are passing at least part of the fuel shock onto customers rather than absorbing it entirely through margins, shifting some of the burden toward the freight-intensive industries.”
U.S. inflation accelerated in September, with the consumer price index up by 3.7% from a year earlier and 0.6% compared to August, the last inflation numbers before the midterms showed on Wednesday.
“The index for gasoline rose 9.1 percent in September, accounting for over half of the monthly all-items increase. The energy index increased 5.2 percent over the month following a 2.1-percent increase in August,” the U.S. Bureau of Labor Statistics said.
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