Citigroup warns: Diesel exports from both the Middle East and Russia are contracting, potentially leading to a global shortfall of 1 million barrels per day this year.

Citigroup warns: Diesel exports from both the Middle East and Russia are contracting, potentially leading to a global shortfall of 1 million barrels per day this year.

The global diesel market is experiencing rapid escalation, with prices rising significantly faster than crude oil. Supply contraction is becoming the main driver of rising refined oil prices.

A report released by Citigroup on September 28 indicated that diesel exports from the Middle East and Russia have contracted simultaneously, and coupled with refinery production cuts, the global diesel shortage is expected to reach approximately 1 million barrels per day this year. Whether the supply situation can be alleviated subsequently depends crucially on when crude oil and refined product transportation through the Strait of Hormuz resumes.

U.S. retail diesel prices have now risen to approximately $6.50 per gallon, up from around $3.40 per gallon at the beginning of the year. Both diesel and heating oil prices are approaching 55-year highs. The diesel crack spread has surged from around $25 per barrel at the beginning of the year to $89 per barrel on September 24, while WTI crude oil only rose by about $25 per barrel during the same period, indicating that the impact of this round of price drops is mainly concentrated on refined product prices.

It is noteworthy that the supply gap is being filled through the inventory system. Global diesel inventories are expected to decrease by approximately 200 million to 250 million barrels this year, but primary inventories are only decreasing by about 50 million to 70 million barrels, indicating that a large amount of inventory depletion has already occurred at the end-user level.

Exports from the Middle East and Russia contracted, and refinery production cuts further widened the gap.

Citigroup estimates that Middle Eastern diesel exports may decrease by approximately 500,000 to 1 million barrels per day, while Russian exports may decrease by approximately 300,000 to 600,000 barrels per day. Coupled with reduced operating rates at refineries in other regions, global diesel supply will tighten further.

Unplanned shutdowns at global refineries in August resulted in a loss of approximately 3 to 4 million barrels per day in refined product output. The disruption to exports, coupled with refinery production cuts, exacerbated market tensions.

Currently, global disclosed diesel inventories are approximately 1 billion barrels, of which about 200 million barrels are held by European governments and about 400 million barrels are OECD commercial inventories. European government inventories thus serve as an important potential buffer, but the supply that can be released quickly remains limited.

If the diplomatic approach fails, Citi believes European government stockpiles may be released no later than after the US midterm elections. The US may also consider restricting diesel exports, but a full ban is unlikely; even if exports are restricted, the large amount of diesel stockpiled along the Gulf Coast could quickly overwhelm local storage capacity.

The reopening of Hormuz is key to the shift in the diesel market.

Citigroup's baseline scenario anticipates that traffic flow in the Strait of Hormuz will return to normal in the fourth quarter of 2026, with a cumulative probability of approximately 70% across various reopening routes, including a 10% chance of a rapid agreement. Under this assumption, Brent crude oil is projected to fall to $65-70 per barrel in 2027.

Another scenario is that the tight oil market continues into 2027, corresponding to an indicative probability of approximately 30%. If the stalemate between the US and Iran continues, diesel supply pressures could persist even longer.

Citigroup's Brent price targets also take into account the assumption of the reopening of the Hormuz: $75/barrel for 0 to 3 months, $70/barrel for 6 to 12 months, and $66/barrel for 2027.

Therefore, the key going forward is not just observing crude oil prices, but also whether the volume of traffic through the Strait of Hormuz, diesel exports from the Middle East and Russia, and diesel crack spreads can improve simultaneously . If Strait of Hormuz transport fails to resume for an extended period, the current path of supply normalization and oil price decline will need to be reassessed; conversely, as transport resumes and inventories are released, diesel crack spreads may decline first.

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