Inflation Could Worsen Due to Seriously Low Diesel Supply

Serious concerns have been raised lately that as the cold weather months approach, fuel costs could go up and worsen inflation due to the seriously low US and global diesel supply. 

According to Patrick De Haan, head of petroleum analysis at GasBuddy, things could be challenging if the US gets a bout of cold weather since the national numbers for distillates are pretty tight and although that doesn’t mean Americans are going to see widespread outages, the situation is uncomfortable.

De Haan said that although the US supply is normally closer to the low to mid-30s in terms of the number of days remaining, the country has about 25 days’ worth of diesel left, a level that’s considered very low.

As Suzanne Danforth, an analyst with Wood Mackenzie, pointed out, this crunch will most probably worsen persistently high inflation not seen in the last four decades since the increase in diesel prices affects direct manufacturing, transportation, and heating costs which also results in rising the costs of goods.

As rising prices could curb demand for products, this could also help push the country into recession and increase the chances of a global recession, Danforth added noting that, however, the slowing down of the economy could help bring diesel prices down.

As colder temperatures increase the seasonal demand for diesel, which is also used in heating on top of powering trucks and buses, a confluence of factors that were long bubbling beneath the surface are now coming to a head, analysts say.

The head of North and Latin American refining and marketing research at S&P Global Commodity Insights, Debnil Chowdhury, notes that demand really starts picking up at the start of heating oil season, as the country enters the winter months.

Diesel markets have also been strained by a confluence of factors, including pandemic-induced reduced refining capacity, increased demand amid COVID-19 recovery, and Chinese export quotas.

Chowdhury stressed that the low inventory is also a result of the fact that the ability to supply diesel was hindered due to the closing of many refineries across the globe and China’s inability to export while the demand for diesel returned a lot faster than for other products.

He also mentioned the demand for jet fuel, which recently increased and may have to compete with diesel at the refinery. 

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