Diesel Prices Surge as Israel-Iran War Further Pressures Market

mwc7ffv(ycr[vqb]n2mp02qz_media_dl_1.png Vortexa data, compiled by Bloomb

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(Bloomberg) — Diesel prices kept rising on Tuesday as concerns about Middle Eastern supplies — a consequence of the Israel-Iran conflict — piled pressure on an already tight market.

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The premium of benchmark futures to crude in Europe breached $20 a barrel, the third straight day of sharp gains, fair value data compiled by Bloomberg show. It’s a clear sign of traders’ concerns about the potential disruption to Middle Eastern exports — a key supply source for the world’s biggest petroleum product market.

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“The outbreak of war has significantly increased risk premiums for the major products exported out of the Persian Gulf,” energy consultancy FGE NexantECA wrote in a report. “After turning its back on Russian diesel, Europe is now dependent on Middle Eastern and Asian diesel.”

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The Israel-Iran conflict began at a time that the global diesel market was already tight. 

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In the US, stockpiles have been at their lowest for the time of year in two decades. 

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In Europe, widespread outages at oil processing plants in Spain — and at BP Plc’s biggest refinery in the region — have pressured supply, while a new environmental rule for Mediterranean shipping that was expected to boost demand for diesel-type fuel recently came into force. Money managers were also increasingly bullish.

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Direct Impact

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While a blockade of the Strait of Hormuz remains a worst-case scenario for diesel markets rather than a reality, the conflict has had a direct supply impact already. 

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An almost 200,000 barrel-a-day Israeli refinery has been shut because of damage, pressuring supply. Rates for shipping fuels out of the Middle East have also jumped, adding to the cost of delivery.

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If maritime commerce through the Strait of Hormuz were to actually stop, the diesel market would be thrown into chaos. Last year, about 850,000 barrels a day of the fuel were shipped through the narrow stretch of water, according to Vortexa data compiled by Bloomberg News. That’s about 3% of global demand.

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Traders also face another potential wild card: the European Union’s proposal to ban imports of petroleum products made from Russian crude. That would effectively puts the bloc’s diesel imports from India and Turkey at risk, according to FGE. 

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See also: EU’s Proposal for Tougher Russian Fuel Ban Has Bite for Traders

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Price moves in ICE Gasoil futures — Europe’s benchmark diesel contract — suggest traders’ supply fears aren’t limited to the here and now. 

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Diesel for July delivery now costs $13.75 a ton more than August, a structure known as backwardation that typically signals market tightness and which has widened — for these two months — since the conflict began. It’s a similar story further down the curve: last Monday, diesel for delivery this December cost just $0.50 more than for December 2026. Now, that premium has ballooned to $24.75.

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“There is still no clarity or end in sight for the conflict and the expectation remains for supply to become more challenging into Europe,” said George Shaw, an oil analyst at Kpler. With so much diesel coming to Europe from the Middle East, the potential for disruption also lifts margins in other supply regions — such as the US Gulf coast — as traders look to these places for alternative barrels.

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—With assistance from Prejula Prem.

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