Analysis: Hormuz Closure Jeopardizes Diesel More Than Crude


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- The closure of the Strait of Hormuz has impacted global 
diesel prices even more than crude oil prices, and for good reasons. 
Comparatively tighter inventories, the loss of millions of bpd of middle 
distillate supply from the Persian Gulf and the cascading effects of the sudden 
disruption of crude oil flows to Asian refiners have the potential to make the 
war-induced diesel shortage more severe than the one on crude oil.

   Front-month ULSD prices have more than doubled since the beginning of the 
year and have shot up by 72% since the beginning of the U.S.-Israeli war on 
Iran, dwarfing even the associated rally in crude prices.

   ULSD futures are now the most backwardated since the European Union 
announced an import ban on Russian petroleum products in October 2022. On 
Thursday (3/19), ULSD for April delivery on NYMEX hovered at $4.41 gallon, 
versus the May contract at $4.15 gallon. The June ULSD contract was further 
apart, at around $3.68 gallon.

   The world was well-stocked with crude oil at the start of the conflict. The 
International Energy Agency in February estimated global observed inventories 
of total oil at a five-year high 8.2 billion bbl, the bulk of which was crude. 
Middle distillate inventories, in contrast, were much closer to historical 
averages, and European inventories have never fully recovered to pre-Ukraine 
war levels.

   The Middle East has since the EU import ban on Russian oil and products 
become a vital supplier of diesel to Europe. The closure of the Strait of 
Hormuz is now effectively shutting in 4 million bpd of middle distillate 
exports from the Persian Gulf, and the war forced shut operations in some of 
the region's largest refineries.

   Middle Eastern crude oil makes up the bulk of many East and Southeast Asian 
refiners' diets. The supply disruption led to refiners throttling operations 
and consequently to several countries imposing export bans on oil products, 
prioritizing domestic fuel supply. Among these was China, the region's largest 
fuel exporter, which has ordered refiners to cease exports until the end of 
March.

   The largest oil supply disruption in history is also easier, and more 
likely, to be eased on the crude than the diesel front. Commercial crude oil 
stocks are well filled, and strategic oil inventories consist mostly of crude 
oil. U.S. leadership has shown a willingness to loosen sanctions on oil exports 
from Russia and even Iran. The European Union, the main sink of Russian diesel 
exports before Russia's invasion of Ukraine, is much less likely to lift import 
embargos.

   While not shielded from price spikes, U.S. middle distillate supply is much 
less vulnerable to the ongoing disruption. Last year, crude from the Persian 
Gulf accounted for less than 8% of imports and 3% of domestic refiner's inputs. 
The U.S. has been a net exporter of middle distillates for nearly two decades. 
Supply on the West Coast, where Middle Eastern crude makes up more than 11% of 
refiners' diets, was more at risk, as the region lacks the infrastructure to 
receive fuels from other parts of the country. The recent waiving of the Jones 
Act, however, now effectively allows domestic shipments from Gulf Coast 
refineries to the West Coast and should mitigate regional supply risks -- at 
least for the next 60 days.




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