Seriously Low Diesel Supply Threatens to Worsen Inflation

A seriously low U.S. and global diesel supply is likely to drive up fuel costs and worsen inflation, raising concerns as the cold weather months approach.

Analysts say that a confluence of factors, long bubbling beneath the surface, are now coming to a head as colder temperatures bring more seasonal demand for diesel, a fuel that powers trucks and buses and is also used in heating.

“This is the start of heating oil season. This is when demand really starts picking up as we enter the winter months,” said Debnil Chowdhury, the head of North and Latin American refining and marketing research at S&P Global Commodity Insights.

A confluence of factors has also strained diesel markets.  These factors include reduced refining capacity due to the pandemic, increased demand amid COVID-19 recovery and Chinese export quotas, Chowdhury said.

“Diesel demand came back a lot faster than other products. There are refineries that shut down across the globe so the ability to supply was hindered,” he said. “And then finally, China, which is a larger diesel exporter … wasn’t able to export.”

In a recent interview with Bloomberg, National Economic Council Director Brian Deese called the inventory levels “unacceptably low” and called on industry to build up its inventory.

Energy Secretary Jennifer Granholm called on industry to cut back its exports of “refined products” which include diesel and gasoline, in recent weeks, arguing that the supply is needed stateside.