Mideast conflict turbocharges diesel prices, squeezing Europe: Bousso
(The opinions expressed here are those of the author, a columnist for Reuters.)
LONDON - The Israel-Iran conflict has boosted global diesel prices, with gains outstripping the jump in crude prices, highlighting the vulnerability of diesel-heavy European consumers even as the region's refiners get a windfall.
Benchmark Brent crude prices have risen by 10% to over $76 a barrel since the start of the Israel-Iran war on June 13, reflecting investor concerns about potential disruption to supply in the Middle East, particularly issues related to the Strait of Hormuz, a narrow waterway between Iran and Oman, through which around a fifth of the world's crude oil and refined products passes.
Speculation over whether U.S. President Donald Trump will join Israel's campaign has further amplified concerns about escalation that could potentially lead to a global energy shock.
Amid the turmoil, benchmark diesel prices have rallied, particularly in Europe. Benchmark European ICE Low Sulphur Gasoil prices have gained nearly 15% since June 12. The past days' rally built on strengthening diesel prices in recent months on the back of robust global demand and low inventories in Europe and the United States.
The Middle East is a major exporter of diesel, shipping 831,000 barrels per day in 2024, roughly 17% of global diesel seaborne imports, according to analytics firm Kpler. The majority of exports come from Kuwait, the United Arab Emirates and Saudi Arabia, which have all been investing in expanding export-oriented domestic refining capacity in recent years.
Diesel, which is used for private and commercial transportation in Europe as well as industrial purposes, accounted for 44% of the region's overall oil demand of 13.5 million bpd in 2024, according to the International Energy Agency.
Europe's imports of the refined fuel exceeded 1.2 million bpd last year, or roughly a fifth of the region's total diesel consumption, according to the IEA. This dependence on diesel imports has left European consumers and businesses highly vulnerable to a disruption in global diesel shipments – which markets fear we could soon see.
On the other hand, the price spike has been good news for European oil refiners.
European diesel refining margins have risen by over 30% since the Israel-Iran conflict began, their highest in more than 14 months, according to LSEG data. This is notable given the simultaneous increase in crude prices, as refining margins typically move inversely to feedstock prices. This time around, however, European refiners are benefitting from the fact that diesel price gains have outpaced those for crude.
RUSSIA LOOPHOLE
While the Middle East tensions are shaking up Europe's short-term diesel price outlook, the market also faces the potential for long-term turbulence.
Europe's diesel market underwent a fundamental shift after the European Union and Britain banned Russian oil imports into the region in the wake of Moscow's invasion of Ukraine in February 2022. The share of Russian diesel in the region's imports dropped from 40% in 2022 to less than 1% last year, according to Kpler data.
Russian diesel imports were replaced with purchases from the Middle East, Turkey and India. But these 'substitutes' sometimes represented refined Russian crude, particularly diesel from India, which benefitted from the fact that Western sanctions limited the price of Russian oil exports.
Now, the European Union is seeking to close this loophole with a proposal to ban imports of refined products produced from Russian oil. Such a ban would be hard to monitor and implement since refiners typically use a blend of crude grades as feedstock, making it almost impossible to determine the exact source of the refined product.
The European diesel market is thus facing both short- and long-term uncertainties, meaning significant volatility in pricing and refining margins is likely for the foreseeable future. Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on LinkedIn and X.
(Ron Bousso; Editing by Nia Williams)
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