Diesel at $5.60: Why Refineries, Not Oil, Are the Real Problem
Crack spreads above $100 per barrel signal a refining capacity crunch, not a crude oil shortage.
Diesel prices have stubbornly remained above $5 per gallon, with on-road diesel reaching the high $5.60s this week, a level that is squeezing carriers, brokers, and shippers alike. The culprit, however, is not the price of crude oil, which has hovered in the $80s, but a refining capacity crunch that has sent crack spreads surging past $100 per barrel, far beyond their typical $15, $25 range.
“It’s not necessarily a crude issue or a crude crisis,” Decker said. “We’re not in a crude crisis, we’re in a refining crisis.” The distinction is critical: while crude oil prices have stabilised, the ability to refine that oil into diesel has been severely constrained, leading to ultra-low distillate inventories not seen since the early 2000s, or even the late 1990s.
The refining bottleneck is not an isolated issue. It is compounded by a series of geopolitical and operational challenges. Ukrainian drone strikes have crippled Russian refineries, which had previously helped backfill global supply gaps. Meanwhile, U.S. Gulf Coast diesel exports remain elevated as domestic refiners prioritise overseas markets, further tightening American supply and consuming domestic refining capacity. Decker highlighted three key indicators he monitors closely: Hormuz tanker traffic, Russian refinery runs, and U.S. distillate inventories.
Brent Crude
Why Refining Capacity Is the Real Issue: Diesel
One of the most troubling signs is the state of distillate inventories, which have plummeted to levels not seen in over two decades. This shortage is particularly acute in the U.S., where refiners have been exporting diesel to meet demand in markets hit harder by the Russia-Ukraine conflict. The result is a double squeeze: domestic supply is constrained, and the refining capacity that could alleviate the shortage is being diverted elsewhere.
The Russia-Ukraine war has played a pivotal role in exacerbating the crisis. March 2022 2022, when the conflict erupted, global diesel markets have been in turmoil. Russian refineries, once a key supplier to Europe and other regions, have been targeted by Ukrainian drone strikes, reducing their output and tightening global supply. The loss of these refineries has forced markets to rely more heavily on U.S. and Middle Eastern refining capacity, further straining an already stretched system.
What This Means for Carriers and Shippers
For carriers, brokers, and shippers, the refining crisis has translated into higher operational costs and increased volatility. Decker estimates that less than 10% of carriers are paying full retail diesel prices, with a major fuel stop operator citing a figure as low as 2%. However, even those with fuel programs in place are feeling the pinch, as the spike in prices has led to a surge in fraud. Decker urged fleet managers to review their fuel programs, pull invoices, and contact their fuel account managers to uncover potential savings.
“When prices spike, fraud also surges,” Decker warned. “Adherence to fraud-protection protocols is critical.” He described some carriers’ approach to fuel programs as “set-it-and-forget-it,” a strategy that leaves money on the table when markets are as volatile as they are now. With diesel prices unlikely to drop significantly in the near term, carriers must adapt to a new reality where fuel costs are a persistent challenge.
The outlook for the remainder of the year is not encouraging. Hurricane season, coupled with El Niño activity, could threaten Gulf Coast refining infrastructure in Q3 and Q4. The Gulf Coast is home to a significant portion of U.S. refining capacity, and any disruption, whether from hurricanes, storms, or other natural events, could further tighten supply and push prices even higher. Decker’s warning is clear: “I don’t anticipate this getting better in the very near future.”
The company was the first to offer real-time transaction authorisation for over-the-road trucking, and earlier this year, it was acquired by Decker and two partners. With 14 years of involvement in the company, Decker’s insights into the diesel market are particularly relevant as the industry grapples with the current crisis.
The refining crisis is a stark reminder of the fragility of global energy markets. While crude oil prices have stabilised, the ability to refine that oil into usable products like diesel remains a critical bottleneck. For carriers, brokers, and shippers, the message is clear: the era of cheap diesel is over, and the focus must shift to managing costs in a high-price environment.
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