Diesel markets, buoyed by the Middle East conflict, face the threat of a global economic slowdown

By Shariq Khan

NEW YORK, March 10 (Reuters) – Rising diesel prices threaten to slow global economic activity as war in the Middle East puts pressure on industrial fuels and the type of crude oil most suitable for production, traders and analysts said.

Diesel has been in tight supply for years due to Ukraine’s attacks on Russian refineries and Western sanctions on Moscow’s exports. Israel and the United States’ war with Iran is exacerbating supply concerns as Tehran blocks shipping in the Strait of Hormuz, through which between 10% and 20% of the world’s marine diesel supplies pass.

“Diesel is structurally the most visible product of this conflict,” said Shahroh Zukhritdinov, founder of Nitrol Trading in Dubai. “Diesel underlies shipping, agriculture, mining and industrial activity, making it the largest sensitive barrel in the system.”

Energy economist Philip Verlager estimates that the loss of diesel supply with the Strait of Hormuz disruption is between 3 and 4 million barrels per day, or about 5% to 12% of total global consumption. Another 500,000 bpd of diesel will be lost due to blocked exports from Middle East refineries, he added.

He said: “By closing the Strait of Hormuz, Iran has reduced exports of crude oil, jet fuel and diesel from the Middle East. There is a term in chess for this: check.”

As a result, diesel prices have risen faster than oil and gasoline since the start of the Middle East conflict, and could double retail levels if the Strait of Hormuz is closed for an extended period of time, Verlager said.

U.S. diesel futures rose more than $28 a barrel from February 27 to March 10, compared with a rise of more than $16 a barrel in U.S. crude oil futures.

Similar movements were recorded in Asian trading hub Singapore and European hub Amsterdam-Rotterdam-Antwerp, resulting in higher diesel prices worldwide.

Economic activity is suffering

Diesel sticker shock is likely to reverberate through the global economy. Sustained for any period, higher diesel and jet fuel prices will lead to demand erosion and slower economic activity, said Sparta Commodities analyst James Nowell-Beswick.

“Transportation costs have risen for everything, which will soon be reflected in food and consumer prices. If diesel prices remain high, the big risk is a second wave of cost inflation,” said Dan Lovelkin, chief executive of US-based small business lender Cardiff.

An increase in diesel prices could have an immediate impact on food prices by forcing farmers to slow down planting during the US harvest.

“Sustained diesel-led oil shocks can naturally lead to inflation as it raises the cost of transporting goods and producing food and goods while squeezing consumers,” said Tashiha Hussainzadeh, founder of Onyx Point Global Management.

Diesel prices, rising from east to west

In Asia, among the Middle East’s main oil importers, the price of 10ppm sulfur diesel was around $33 a barrel, after hitting a three-and-a-half-year high of $48 on March 4, about $12 higher than before the war.

In Europe, also a key importer of Middle Eastern refined products, ultra-low sulfur diesel barge prices in the Amsterdam-Rotterdam-Antwerp trade hub have climbed nearly 55% since Feb. 27 to $1,165 per metric ton, Quantum Commodities data showed.

Europe, which as a top importer is one of the biggest drivers of diesel prices, is particularly constrained by Middle Eastern imports due to efforts to curb Russian supplies, said Alex Hodes, head of market strategy at StoneX.

“Historically, (diesel) probably sold above $20-$25/bbl of crude oil, but these days we’ve seen the range of $30-$65/bbl and even higher,” said Tom Kluza, senior adviser to oil supplier Gulf Oil.

“Great margins for this oil could essentially pay all the bills for U.S. and foreign refiners.”

(Reporting by Shariq Khan in New York, additional reporting by Trixie Yap in Singapore; Editing by Lincoln Feast.)