Episode summary
The Global Diesel Problem
Thoughts on the Market (Morgan Stanley)
· · 14 min · Hosts: Andrew Sheets, Martin Ratz
Summary
Diesel is unusually tight because the market has lost a large chunk of refining output tied to the Middle East and Russia, leaving about 1.5 million barrels a day of diesel supply missing from an 8 million barrel a day seaborne market. The guest says diesel matters far beyond cars because it is the fuel for trucks, trains, ships, tractors, generators, home heating, and other industrial uses, and its high energy density makes it harder to replace quickly with electrification.
The guest argues that the price signal is now extreme: crude is around $100 a barrel, while diesel has recently traded above $200 a barrel, implying a crack spread around $100 a barrel, far above normal levels. He says refineries are already running flat out, and their product mix is largely fixed by design, so there is no easy way to simply make more diesel.
Despite near-record prices, the evidence for broad demand destruction is still limited outside China. The guest says some substitution is already visible, such as U.S. railroads pulling freight from trucks to trains, but inventories and subsidies are cushioning the shock. He also warns that export bans could backfire, including by raising gasoline prices in the United States.
Key takeaways
- The guest says the market is missing about 1.5 million barrels a day of diesel supply because roughly 4 to 5 million barrels a day of refining capacity is offline, much of it in the Middle East and Russia.
- He says diesel prices have reached more than $200 a barrel, implying an unprecedented crack spread of about $100 a barrel.
- The guest argues refineries cannot quickly retool toward diesel because their configurations are fixed and most are already running at 100% utilization.
- He says demand destruction is visible in China but remains limited elsewhere because diesel is hard to replace in the short run and customers can draw on inventories.
- He warns that a diesel export ban could produce unintended consequences, including higher gasoline prices in the United States.
Notable quotes
“diesel is at the heart of it but it's only one of many. At the moment we are short in terms of refinery runs”
“we are missing something like 1 and a.5 million barrels a day of global diesel supply all into the seaborn market”
“a couple of days ago, we got to all-time high nominal term diesel prices over $200 per barrel”
“there is a good reason why this has has not happened yet because the United States is broadly balanced in gasoline”
“a diesel export ban could lead to higher gasoline prices. So a lot of these things have unintended consequences”
How the episode opens
Welcome to Thoughts on the Market. I'm Andrew Sheets, global head of fixed income research at Morgan Stanley. And I'm Martin Ratz, head of commodity research at Morgan Stanley.
Today, the secret life of diesel and why there's so much attention on it. It's Thursday, September 24th at 2 p.m. in London.
Diesel is a fuel that I think a lot of investors may be aware of, but not familiar with, so to speak. It's often the other price that you see when you're driving down the road. But Martin, it's incredibly important for the industrial side of the economy and unusually disrupted by current geopolitical events.
And so I'd like to really start at the top or technically the middle of the barrel so to speak. What is diesel and what makes it so special?
Yeah. When people talk about diesel at the moment, they really talk about so three things combined. They talk about outright diesel as well as jet fuel and also heating oil.
These are effectively part of the same pool of molecules coming out of the refinery. And so when you look at that sort of pool of molecules, you you talk about the things that uh fuel trucks, trains, ships, tractors and agriculture, excavators, generators, home heating. It is uh a molecule that has a tremendously broad uh range of applications.
It's really the fuel of the industrial economy. One of the characteristics of diesel is that it has very high energy density. In contrast to say gasoline, electrifying the uses of diesel is harder because it carries so much punch.
And why has there been so much on diesel recently given the current energy disruption in these geopolitical events? — Yeah. So the global refining system normally processes about 85 million barrels a day of crude oil and and from that it makes a range of products.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- diesel supply squeeze
- refining capacity shortfall
- diesel prices
- geopolitical energy disruption
- industrial energy demand
Companies and tickers mentioned
- MS
- Morgan Stanley
Watch the episode
Watch “The Global Diesel Problem” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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