Morgan Stanley has warned of a diesel shortage in Europe. In the U.S., prices have risen by a third

A diesel fuel shortage is unfolding in Europe, driven by a confluence of serious supply issues, according to Morgan Stanley analysts. The bank’s analysts have noted record refining margins in the region and a sharp decline in inventories, according to Bloomberg. Major disruptions in global supply chains have already triggered a sharp spike in fuel prices in the U.S. as well, adds MarketWatch.

Starting in August, diesel inventories in Europe will begin to decline steadily and will reach a low of about 299 million barrels by November—the lowest level for this time of year since at least 2015, according to a forecast by Morgan Stanley, as cited by Bloomberg. Diesel refining margins in Northwestern Europe have soared to a historic high, the bank says.

"The situation is indeed tense," noted analysts at Morgan Stanley. "Our supply-and-demand model indicates that European diesel inventories will fall to multi-year lows by the end of the year."

Diesel fuel, which has a higher energy density than gasoline, is the primary fuel for heavy-duty vehicles—commercial trucks, school buses, and farm machinery, according to MarketWatch. In addition, diesel powers generators and compressors that keep food fresh as part of the so-called cold chain.

In July, global energy markets were shaken by a new escalation in the conflict between the U.S. and Iran, with prices for petroleum products rising more sharply than those for crude oil itself, Bloomberg notes. This market is currently tightening due to a variety of factors, including disruptions in the Strait of Hormuz and Ukraine’s attacks on Russian refineries.

“The main bottleneck in the oil system right now is oil refining, not oil production,” Morgan Stanley emphasized, pointing to unsold shipments of African oil and “bearish” contango (a situation where futures prices are higher than spot prices) in certain market segments. “The diesel fuel market, and Europe in particular, has become the epicenter of all this.”

Taking a broader view, the market situation is also influenced by developments in China’s oil industry, where refineries have reduced their crude processing volumes. “China never supplies diesel fuel directly to Europe,” analysts explained, “but when China refines less, there is simply less product in the international system that could flow to the West.”

At the same time, Morgan Stanley believes that this shortage is already priced in and therefore advises investors to refrain from betting on further gains from current levels. "The market is already fully priced—there’s no point in trying to jump on a train that’s already leaving," they noted.

On Monday, European diesel futures rose 3.5% to $1,219.5 per metric ton, their highest level since May 20.

Meanwhile, in the U.S., retail diesel prices have averaged more than $5 per gallon—more than $1.30 higher than a year ago. This spike threatens to cause serious damage to the economy, according to MarketWatch.

The rise in diesel prices is likely to fuel inflation and lead to higher food prices due to increased logistics and agricultural costs. In addition, rising fuel prices typically dampen public optimism and cause people to worry more about their personal finances, as diesel indirectly affects all sectors of the economy, the publication noted.

The situation in the U.S. market is exacerbated by the fact that Russia has imposed a ban on diesel fuel exports through at least the end of July. This has created a global shortage and turned the U.S. into a “last-resort” supplier, explains MarketWatch.

According to Robin Mills, CEO of the Dubai-based consulting firm Qamar Energy, while Russia exported about 800,000 barrels of diesel per day last year, volumes fell to about 234,000 barrels at the beginning of this month due to the attacks. Deprived of these supplies, importing countries switched to American fuel, which pushed up prices in the U.S.

“Whether this will become a long-term problem depends on how successful Ukraine’s campaign continues to be. So far, Kyiv’s updated tactics this year have proven very effective, and Russian repair crews can’t keep up with the damage,” Mills noted (quoted by MarketWatch).

Against this backdrop, the U.S. has pushed fuel exports to record levels. As long as it remains more profitable for producers to export diesel abroad rather than supply it to the domestic market, prices within the United States will remain high.

“If Europe is willing to pay a premium per barrel of diesel, then it will be exported. Theoretically, prices would have to rise to the point where either demand in the U.S. itself would fall or international demand for those volumes would decline,” explains Kpler oil analyst Matt Smith (as quoted by MarketWatch).

This article was AI-translated and verified by a human editor