How Are Foreign Institutions Viewing the Diesel Crisis in September? Crack Spreads, Cost Pass-Through, and Stagflation Risks

Author: 見微知著雜談

The recent diesel price is a point that deserves close attention, as this industrial "blood" is being repriced.

Brent crude is currently around $104, far below the $130 high during the Ukraine crisis, but diesel has surged to unprecedented prices.

U.S. retail diesel broke through $6 per gallon for the first time, then climbed further to a record high of $6.20; the premium of European low-sulfur diesel over crude soared from $21 in January to $75, and Bloomberg summarized this phenomenon as "record crack spreads stoking central bank inflation concerns."

Unlike gasoline, which mainly serves passenger car travel and is a consumer-end fuel. Diesel consumption is highly concentrated in productive sectors such as freight heavy trucks, agricultural machinery, construction and mining equipment, railway locomotives, and inland and marine vessels.

The impact of diesel price increases is not about residents' travel costs, but about intermediate input costs—directly penetrating CPI and PPI through freight rates, agricultural product costs, mining cash costs, and infrastructure and industrial margins.

Therefore, "diesel is the blood of the industrial economy" is more accurate than "crude oil is the blood": crude oil is the raw material, while diesel is the part that has already become a means of production.

From the supply side, the global diesel market is facing a historic double blow.

The first shock comes from Russia.

According to Reuters, over the past six months or so, Russian refining facilities have suffered sustained attacks, with core equipment crucial for diesel production—such as crude distillation units and hydrocracking units—becoming primary targets.

In June, Russian refinery throughput fell to about 4.1 million barrels per day, a year-on-year decline of about 30%, a multi-year low; during the same period, Russian crude oil production was about 8.7 million barrels per day, but due to refinery attacks, a large amount of crude could not be fully converted into diesel.

Half of the top six diesel-producing refineries have significantly cut production or shut down—the Kirishi refinery is closed, and Volgograd and NORSI are operating at only about a quarter of capacity.

Diesel exports plummeted from a normal monthly level of about 2.5 million tons to less than 1 million tons in June. Russia banned gasoline exports from April and diesel exports from July, with the ban expected to last until September 30, and domestic diesel prices have risen 60%. Even if repairs begin now, the damaged refineries will take months to recover.

The second shock comes from the Middle East.

After the Iran conflict broke out in February, multiple refineries were damaged, and passage through the Strait of Hormuz, a critical energy transport chokepoint, was severely disrupted.

Bloomberg, citing estimates by Vitol Group's CEO at a Singapore conference, noted that Middle East refined product exports have fallen by about 2 million barrels per day, and Russia's by about 2 million barrels per day, for a combined total of about 4 million barrels per day. Before the conflict escalated, these two regions together accounted for nearly 45% of global seaborne diesel trade.

Global refinery output reached 81.4 million barrels per day at the August summer peak—thanks to U.S. refineries operating near record efficiency—but was still 4.2 million barrels per day lower than the same period last year.

The nature of the problem has changed; it is no longer a simple crude oil supply disruption, but a systemic crisis of damaged refining capacity.

Below we look at foreign institutions' views on diesel since September.

[Morgan Stanley, Energy: The Changing Face of the Majors, 2026.09.03]

Core view: Diesel prices have surged rapidly to record highs, and historical data suggest this is likely to affect inflation at some point. The report's chart comparing U.S. CPI with New York Harbor ultra-low sulfur diesel (ULSD) futures shows a lagged but definite transmission relationship between sharp diesel price increases and CPI.

[BofA Securities, Global Economic Viewpoint: Back to School: Surfing the supply shocks, 2026.09.08]

Core view: High crack spreads are pushing up downstream production costs. The Singapore 10ppm diesel benchmark remains at a high of $150/barrel, reflecting supply constraints from Middle East and Russian refinery capacity. High crack spreads will translate into higher producer costs, and without additional relief measures, will ultimately be passed on to end consumers.

[J.P. Morgan, Renewable Diesel Weekly, 2026.09.08]

Core view: For the week ending September 4, U.S. West Coast diesel prices were about $4.70/gallon, having surged from $2.40 to over $4.50 after the February conflict. The spread for renewable diesel (made from soybean oil and animal fats) is highly correlated with fossil diesel, and high diesel prices actually improve the economics of renewable diesel—although feedstock costs also rise in tandem with vegetable oil prices.

[BofA Securities, The Flow Show: Those yields might not hurt yet, but diesel, 2026.09.10]

Core view: Diesel, not crude oil, is the real key pressure point for the real economy. Crude oil prices are far below the Ukraine crisis peak, but U.S. diesel has hit a record $6/gallon. Diesel impacts five major industries: shipping, trucking, agriculture, construction, and mining. Watch whether the transportation ETF IYT breaks below its 200-day moving average at the 80 level; a break would confirm a shift from "summer de-risking" to an "autumn stagflation event." The Bull & Bear indicator is at 9.5, in extreme bullish territory, and diesel-driven stagflation risk is not yet fully priced in.

[J.P. Morgan, Energy: A 'Forever Conflict' Can Persist, 2026.09.10]

Core view: Despite record supply shocks, Brent crude remains contained (average around $97 from March to June), while market pressure has shifted to the refined products side—European distillate crack spreads are near a record $80/barrel, and global diesel prices are at historic highs. Key implication: Market pressure is expressed more through crack spreads than through absolute crude prices. The forward curve may be mispriced: if the conflict persists longer, the front end over the next 16 months is overvalued by about $6, and the back end undervalued by about $10.

[Nomura, Morning News & Views Asia, 2026.09.10]

Core view: Diesel/gasoil crack spreads are at historic highs, and the spread between products and crude continues to widen. In early September, U.S. diesel crack spreads broke above $106/barrel. China's sudden resumption of crude imports and refineries taking advantage of high crack spreads to increase refined product exports are posing further upside risks to crude prices.

[Goldman Sachs, China Machinery: Genset supply chain trip takeaways, 2026.09.10]

Core view: Demand for diesel backup generator sets for data centers is strong, with the U.S. market growing fastest (25-30%), and China and Southeast Asia around 20%. Demand is upgrading from 2.0-2.2MW to 2.6MW+ (non-U.S. markets) and 3MW+ (North America), supporting higher unit selling prices. Supply chain capacity is generally constrained, and near-term shipments are more limited by capacity than demand—this indirectly shows that rigid demand for diesel as backup power for industry and infrastructure is still expanding.

[Goldman Sachs, China Economic Activity and Policy Tracker, 2026.09.11]

Core view: As of mid-September, China's domestic diesel and gasoline retail prices have remained unchanged for a week. Diesel prices are about 9,000 yuan/ton (compared to the year's high of about 9,800 yuan/ton in May), while Brent fell from $105 in May to about $100/barrel in September. This indicates that China's domestic refined product pricing mechanism has to some extent buffered international market fluctuations.

[Morgan Stanley, Tesla: $6 Diesel...Enter Tesla Semi, 2026.09.11]

Core view: $6 diesel is rewriting the economics of transportation energy. A traditional diesel truck with a human driver costs $2.67 per mile and earns an annual profit of $31,200; an autonomous electric Semi costs $2.13 per mile and earns an annual profit of $188,800—a sixfold profit expansion. The core driver is not only cost savings from removing the driver, but also utilization rising from 92,400 miles/year to 215,200 miles/year (2.33 times). By 2040, if 82,000 Semis are operating (13.5% market share), autonomous driving software could generate $17 billion in revenue and about $7.5 billion in incremental EBIT.

[Deutsche Bank, US Fixed Income Weekly: Strategy Update, 2026.09.11]

Core view: Diesel has risen about 30% more than gasoline since June, and wholesale diesel prices have reached new highs. Gasoline accounts for about 3.8% of CPI weight, and a 30% diesel increase would have a direct CPI impact of less than 7bp—but diesel accounts for about 70% of petroleum products used as intermediate inputs in the U.S. economy (gasoline only 12%). Based on input-output table estimates, diesel-driven petroleum costs have risen 30% since summer, corresponding to an upside risk of about 20-25bp for core inflation (assuming full pass-through).

[Goldman Sachs, Oil Products Tracker: Large Russia & Mideast Export Shortfall Trumps China Pickup, 2026.09.11]

Core view: U.S. retail diesel prices have reached a record high of $6/gallon. Ongoing refinery outages in the Middle East and Russia, counter-seasonal inventory draws, and rising risk premiums are pushing diesel prices and margins higher. In the base case, Middle East shipping disruptions and attacks on Russian refineries will persist until mid-2027 before gradually easing. Forecasts for Q4 2026 U.S./European diesel margins remain high at $75/$65 respectively. OECD diesel inventories are 2% lower year-on-year, and U.S. diesel inventories have drawn 3% since mid-July, with no seasonal build ahead of the Q4 demand peak.

[Deutsche Bank, Global Fixed Income Weekly: Strategy Update, 2026.09.12]

Core view: Crude and wholesale gasoline prices are below spring highs, but wholesale diesel prices hit new highs again this week. Diesel accounts for 70% of intermediate-input petroleum, gasoline only 12%, and jet fuel 18%; diesel price increases exert far greater upward pressure on PPI core intermediate goods than gasoline—the year-on-year growth rate of PPI core intermediate goods has entered the 10% range in 2026, while the petroleum cost proxy indicator is up nearly 100% year-on-year.

[Goldman Sachs, Australia Metals & Mining Gold Book, 2026.09.15]

Core view: In the June quarter, most gold producers confirmed that diesel cost pressures are beginning to pass through, with diesel accounting for about 1%-10% of all-in sustaining costs for gold mines. Combined with broader labor and consumables inflation, the average AISC guidance for FY27 has been revised up 15%-20% year-on-year, while production growth is only about 5%. Diesel price increases are directly eroding mining profits, and reserve pricing assumptions have been correspondingly raised to >A$3,100/oz.

Below is an article from Goldman Sachs in August.

Diesel, Not Crude, Remains the Cleaner Geopolitical Hedge

[Goldman Sachs, 13 August 2026]

Since the outbreak of the Iran war, we have maintained that the Strait of Hormuz supply shock is more disruptive to refined products—especially diesel—than to crude oil itself.

Near-record spot diesel crack spreads have already acted as a "solution," prompting a strong supply response from refineries with spare capacity, including raising utilization rates and shifting product yields toward diesel.

Therefore, an absolute diesel shortage this year still appears unlikely.

Nevertheless, we reiterate our recommendation to use forward diesel time spreads (e.g., Dec 2026-Mar 2027 European diesel spread) to hedge geopolitical risk.

Heading into the 2026-2027 winter, the risk of persistent scarcity pricing in diesel is higher than in crude for four reasons:

1) Even before the Iran war, diesel and refining capacity were structurally much tighter than crude.

2) Supply shocks from the Middle East and Russia hit diesel harder.

3) Unlike crude, Q4 seasonality should further tighten the diesel supply-demand balance.

4) Chinese policy is more likely to cap upside in crude prices than in diesel.

We believe forward diesel time spreads (such as the Dec 2026-Mar 2027 European diesel spread) and long European natural gas TTF positions are attractive geopolitical hedges.

Chart 1: Global diesel exports down 26% year-on-year

Heading into the 2026-2027 winter, the risk of persistent scarcity pricing in diesel is higher than in crude: diesel was already structurally tight before the war, has greater exposure to Middle East and Russian supply disruptions and Q4 seasonality, and is less likely than crude to be stabilized by Chinese policy.

Chart 2: We still recommend using the Dec 2026-Mar 2027 European diesel time spread as a geopolitical hedge

Diesel supply is tighter than crude supply, with global diesel exports down 26% year-on-year, twice the decline in crude exports (13%).

1. The diesel market is structurally tighter than the crude market

Due to long-term demand uncertainty suppressing investment and prompting OECD countries to close refineries, refining capacity growth has lagged, leading to global refinery utilization rates well above average in 2025 (Chart 3).

In contrast, crude supply has grown rapidly—led by U.S. shale, Brazil, and Guyana—with nearly 4 million barrels per day of spare capacity before the Iran war.

Increased supply of light shale oil (which has lower diesel yields) and declining gasoline demand driven by electric vehicles also help explain why diesel is tighter than gasoline.

Chart 3: Global refining capacity growth slowed in 2020-2025 (mainly due to OECD refinery closures), pushing utilization rates to high levels before the Iran war

2. Middle East and Russian supply shocks hit diesel harder

Supply shocks from the Middle East and Russia are more disruptive to refined products—especially diesel—than to crude oil itself.

After drone attacks and combined refinery outages of about 6-7 million barrels per day in the Middle East and Russia (Chart 4), our real-time forecast of global refinery throughput has fallen by 5-9 million barrels per day year-on-year in recent weeks, near the largest decline on record outside of pandemics.

Chart 4: Combined refinery outages in the Middle East and Russia total 6-7 million barrels per day

The Iran war's supply shock to diesel is more destructive than to crude for four reasons:

1) Refineries are large, above-ground, high-value targets, more likely to suffer direct physical damage than dispersed oil fields.

2) In Middle East pipeline capacity, crude oil far exceeds refined products.

3) Gulf national oil companies appear to prioritize long-term crude supply contracts, especially to highly dependent Asian buyers.

Middle East crude is typically medium or heavy, and therefore yields more diesel than light crude.

4) Kpler data shows Persian Gulf diesel flows are down 80% year-on-year, while crude flows are down 48% (Chart 5).

Chart 5: Kpler data shows Persian Gulf diesel flows down 80% year-on-year, while crude flows down 48%

Note: Estimated Persian Gulf flows include flows through the Strait of Hormuz, the Gulf of Oman, and the ports of Yanbu (Saudi Arabia) and Fujairah (UAE), as well as Botas Ceyhan.

3. Q4 seasonality should tighten the diesel market, not the crude market

Diesel demand typically strengthens in Q4 (Chart 6), while crude demand—i.e., refinery throughput—typically declines due to increased maintenance. Lower throughput also reduces output of refined products, including diesel.

The diesel supply-demand balance faces greater tightening risk than crude in H2 2026.

On the demand side, a cold winter could boost heating oil demand.

On the supply side, refinery output faces downside risks from the Atlantic hurricane season (especially the U.S. Gulf Coast) from August to October, and the risk of unplanned outages in Q4 after unusually low planned maintenance in Q3.

Chart 6: Diesel demand typically strengthens in Q4, while crude demand—i.e., refinery throughput—typically declines

Note: We define global crude demand as refinery throughput.

4. China is more likely to cap upside in crude prices than in diesel

China tends to stabilize the crude market through price-sensitive net crude imports; in early July, net crude imports fell by 5.5 million barrels per day year-on-year, a decline of slightly over 50% (Chart 7).

After China announced an increase in refined product export quotas earlier this month, investors asked whether China could stabilize refined product and diesel markets with the same intensity.

We are skeptical for four reasons:

1) China-driven fluctuations in net diesel imports are typically much smaller than in crude (Chart 7).

2) China's total refined product export quotas for 2026 appear roughly flat compared to last year.

3) The government is reportedly likely to continue prioritizing domestic energy security, requiring refineries to maintain inventories above end-February levels.

4) A significant increase in refined product investment or exports by China could conflict with policymakers' long-term goals, including decarbonization.

Chart 7: China-driven fluctuations in net diesel imports are typically much smaller than in crude

Geopolitical hedges: Diesel spreads and TTF preferred over crude

Heading into winter, forward diesel time spreads (such as the Dec 2026-Mar 2027 European diesel spread) and long European natural gas positions (tighter than crude) are more attractive geopolitical hedges than long crude positions, as they offer greater potential price upside.

In a weaker supply scenario than our base case, we estimate the following potential upside from current spot prices:

1) Diesel time spread: If spot spreads remain near current levels and supply tightness drives a strong upward shift in the forward curve, the Dec 2026-Mar 2027 European diesel spread has about 70% upside.

2) TTF: In a scenario where Middle East energy exports normalize only gradually into 2027, suppressing Asian LNG demand, TTF prices peak near €105/MWh around year-end (current spot €61), about 70% upside.

3) Brent: In a scenario where Middle East energy exports normalize only gradually into 2027, prices peak near $120/barrel, about 35% upside.

Based on historical relationships between prices and inventories (crude) or demand (natural gas), actual price increases could exceed these upside estimates. The price spikes in 2022 and April 2026 show that when physical and financial buyers are highly concerned about future supply and shortages, markets can overshoot model-implied levels.

Asset-specific factors could provide further upside beyond these estimates:

1) Diesel time spread: If refineries suffer more intense drone attacks or hurricane-related disruptions affect Atlantic refinery output, leading to further diesel supply weakness, spot spreads could rise further.

2) TTF: If winter is colder than average, a larger price spike may be needed to curb additional demand and limit weather-driven natural gas inventory draws.

3) Brent: If shipping disruptions in the Strait of Hormuz, Bab el-Mandeb, and Suez Canal persist, we estimate an additional $25/barrel (about 30%) upside relative to our price upside scenario.