Analysis: U.S. Diesel Margins Soar on Global Supply Dearth


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- Diesel cracks have rallied to unprecedented levels and are 
set to stay elevated amid a growing divergence between global crude oil and 
refined product balances. The ULSD crack versus WTI last week surpassed $100 
bbl for the first time in history, compared to $31.51 bbl at the start of the 
year, and to $42.01 bbl on February 27, the last trading day before the start 
of the U.S.-Israeli war on Iran. Tightening global supply fundamentals and low 
fuel inventories continue to support product prices, while on the crude oil 
side, demand destruction and workarounds around supply disruptions have led to 
a comparatively much smaller supply deficit.

    U.S. refiners, having been relatively unaffected by the crude supply 
disruption and enjoying easy access to vast export capacity, continue to be in 
a prime position to fill part of the global gap. On the week ended August 14?, 
they processed just shy of 17.4 million bpd of crude oil, the most since 
September 2019, when operable capacity was nearly 800,000 bpd higher, according 
to federal data. Over the past four weeks, domestic refiners utilized 96.8% of 
operable capacity, compared to 96.3% in the same period in 2025. While 
utilization rates have recently narrowed the gap to year-ago levels, refiners 
have this season run this hard for far longer than in a normal year: 
utilization has been above 95% since the end of May, a range usually reserved 
for a few weeks in August. Running near maximum capacity for this long, 
especially after a relatively shallow spring maintenance season, greatly 
increases the risk of refinery outages, which can tilt the already skewed 
supply-demand balance even more, especially given the lack of spare production 
capacity both at home and abroad.

   Near-maximum utilization and months of fine-tuning operations in favor of 
higher jet fuel and diesel yields have led to record output of these products, 
but also imply limited room for further growth. Over the past four weeks, 
combined production of jet fuel and distillate fuel oil ran some 193,000 bpd 
ahead of year-ago levels. Gulf Coast refiners, responsible for the bulk of 
domestic diesel production, have during this time operated at 97.7% of 
available capacity, compared to 96.7% in the same period in 2025. At refiners 
in the Midwest, who provide a quarter of domestic diesel supply, utilization 
averaged 99.9%, according to U.S. Energy Information Administration (EIA) data.

    Diesel Stays Scarce

   The closure of the Strait of Hormuz and war damages to refineries in the 
Persian Gulf have since early March considerably tightened global diesel 
supply. Aside from the direct loss of some 5 million bpd of refined product 
exports, the market had to contend with a still ongoing crude-shortage-induced 
refining lull affecting most of Asia, which sources crude oil primarily from 
the Middle East. Global refining rates, and consequently fuel supply, collapsed 
to their lowest since the pandemic demand shock of 2020.

   At the same time, Ukraine has been stepping up its attacks on Russian energy 
infrastructure, taking offline around a third of refining capacity, 
subsequently leading to refined product export bans and fuel shortages, further 
tightening the screws on the global diesel market. Last month, the ULSD crack 
versus WTI surpassed the previous record high $86.82 bbl reached in October 
2022 after the European Union agreed to ban refined fuel imports from Russia, 
back then the economic bloc's primary diesel supplier, and has been trading 
above this level for the past two weeks.

   The global supply crunch led to record-high U.S. diesel exports putting 
additional strain on inventories. Nationwide distillate fuel oil stocks fell to 
a 30-year seasonal low of 105.6 million bbl on the week ended August 14 down 9% 
year-on-year, 12.8% below the five-year and a whopping 22% below the ten-year 
seasonal average.

   Prices at the pump reflected the tightening market. The national average 
retail diesel price last week surged by 19.7cts to a three-month high $5.454 
gallon, up $1.741 gallon year-on-year.

    Fundamental Differences

   After rallying in the wake of Russia's invasion of Ukraine in February 2022, 
refining margins, despite peaking only two months into the war, took 18 months 
to fall back to pre-war levels. This time, crack spreads have been continuously 
rising with few interruptions throughout the now nearly six-month long conflict 
in the Middle East. The 3:2:1 crack spread versus WTI, a rough proxy for 
refining margins, surpassed 2022 highs several times last month.

   While western sanctions on Russian oil sales have slightly dented supply, 
they mostly led to a rearrangement of global trade flows. This made both diesel 
imports and production significantly more expensive for former buyers of 
Russian crude oil and diesel. This, in conjunction with the need to establish 
new supply chains, kept inventories in key markets low -- global supply, 
however, was largely unscathed. The ongoing disruption in the Persian Gulf, in 
contrast, has removed millions of bpd of unrecoverable actual physical crude 
oil and product supply.

   Depleted fuel inventories, low global refining runs and seasonally rising 
demand are set to support margins moving forward. Refiner crude throughput is 
still trailing year-ago levels on a global scale by some 5 million bpd, and the 
price-induced demand slump in fuels was much less pronounced than the 
logistics-caused demand destruction on the crude oil side. This will keep 
refiners incentivized to run as hard as possible and prioritize diesel yields 
over those of other, less profitable fuels.

    

    




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