G7 moves to ease global diesel squeeze as refinery system hits its limits

Global fuel markets strained due to closure of Strait of Hormuzl, global energy shock

G7 leaders are coordinating refinery maintenance and releasing 100 million barrels of emergency oil stocks as a global diesel shortage puts growing pressure on fuel prices and the economy.

The measures announced Friday are aimed at a problem that has moved beyond crude oil supply. Refineries and inventories are now under severe strain after months of disruption from the Middle East war and attacks on Russian energy infrastructure.

The G7 said members will coordinate refinery maintenance schedules to avoid simultaneous shutdowns, temporarily raise refinery utilisation where possible and encourage other countries with large refining sectors to increase production, particularly diesel. The group also committed to an immediate coordinated release of 100 million barrels through the International Energy Agency over four months, including a substantial diesel release in the first 20 days.

The September IEA Oil Market Report shows why governments are worried.

U.S. diesel and gasoil prices exceeded $200 a barrel in early September, 94 per cent above pre-war levels. Gulf diesel exports averaged just 390,000 b/d in August, barely one-quarter of their pre-war level.

Russia has added another shock. Combined Gulf and Russian diesel exports were 1.6 million b/d lower in August than in February. Before the war, those suppliers accounted for almost 45 per cent of global seaborne diesel trade.

Refiners elsewhere are running hard to fill the gap. But global refinery throughput remained 4.2 million b/d below a year earlier in August. The IEA says the global refining system is now “stretched to the limit.”

Inventories are also being depleted. Global observed oil stocks have fallen 507 million barrels since the war began, an average draw of 2.8 million b/d.

Hirs: inventories provide only a temporary cushion

University of Houston energy economist Ed Hirs told Energi Media earlier this year that strategic stock releases had prevented an even sharper oil-price shock, but warned that inventories could only provide a temporary cushion.

Hirs said the disruption was already spreading through refined-product markets and global supply chains. “The breakdown of product delivery has seen prices up above $150 a barrel for diesel and above $170 a barrel for jet fuel,” he said. Refineries were responding by shifting production toward the fuels commanding the highest prices, but that could not quickly replace lost supply.

“This rearrangement of the global supply chain for our liquid hydrocarbons has really had a tremendous impact for consuming nations,” Hirs said. He warned that continued inventory drawdowns would leave markets increasingly exposed if the disruption lasted for months.

“Once these releases are done, we are, as some pundits say, scraping the bottom of the barrel for inventories,” Hirs said.

Hirs also pointed to the particular pressure on refined fuels. “The breakdown of product delivery has seen prices up above $150 a barrel for diesel and above $170 a barrel for jet fuel,” he said at the time.

The G7 measures amount to an attempt to stretch the remaining buffer while keeping as much refining capacity operating as possible. Leaders also asked the IEA to report back within 20 days and recommend further action, including how emergency stocks should eventually be replenished.

For consumers, the immediate risk is no longer simply whether enough crude oil exists. It is whether the global system can turn enough of that crude into diesel and other fuels — and deliver them where they are needed.