Oil & Gas

Moody's has predicted a significant increase in diesel prices in the United States, with a rise of over $1 per gallon from pre-pandemic levels, reaching $4.50 per gallon. This projection reflects the tightening supply and increasing demand for diesel, as evidenced by a threefold increase in fuel imports from India to Europe in February. However, the supply of diesel is facing challenges, particularly in the U.S. where distillate inventories remain below the five-year average despite significant weekly builds earlier this year. In Europe, the refining capacity is strained, leading to a greater reliance on imports, which could become more expensive due to restrictions on Russian crude going to India.

Globally, trade flows are on the rise, with world trade volume reaching its highest level in 10 months in January. This uptick in economic activity is also reflected in the freight sector, as Heathrow Airport in London reported its busiest start to the year for freight since before the pandemic. These trends indicate a strengthening of trade worldwide, which could further drive up diesel demand.

The increase in diesel demand is also fueled by the rerouting of ships around Africa, which has led to an increase in bunkering demand, primarily for diesel. This additional demand, coupled with the existing strong demand, suggests that diesel consumption may continue to rise.

A year ago, concerns about a diesel shortage were prevalent among oil traders due to surging trade and demand during the pandemic lockdowns. However, the market did not respond with increased production, leading to an imbalanced market. With economic activity now recovering, especially with the prospect of rate cuts, particularly in the United States, fuel demand is expected to rise further. This, combined with limited refining capacity post-lockdowns, could lead to higher diesel prices and possibly a shortage.