Global Diesel Crisis to Extend Through 2027 Amidst Iran Conflict, Warns IEA

The International Energy Agency (IEA) has issued a stark warning: the global diesel shortage, exacerbated by the ongoing conflict involving Iran, is projected to persist well into 2027. Depleted inventories are not expected to rebound until the latter half of next year, according to the agency's latest monthly oil market report. Even with refineries boosting output towards the end of the year, supplies of gas oil, which encompasses diesel and heating oil, are anticipated to fall short of demand in the fourth quarter.

The IEA highlighted that without a significant recovery in refined-product exports from the Middle East, further demand reduction and the "heavy economic costs these will entail" might be necessary to stabilize the market. This comes as wholesale diesel prices reached record highs in Europe and the US last month, exceeding $220 a barrel, and surpassed $200 in Singapore. While prices have since moderated, they remain nearly double crude benchmarks and pre-conflict levels. In the US, diesel pump prices climbed above $6 a gallon for the first time in September, a 70 percent increase since the conflict began, the IEA reported.

This shortage is attributed to a substantial drop in shipments from key suppliers. Combined net gas oil exports from the Middle East and Russia saw a decline of over 60 percent annually last month, reaching 820,000 barrels per day, a loss of 1.3 million bpd. Constraints on Gulf export routes and damage to Russian oil refineries from Ukrainian drone strikes have contributed to this reduction. Despite increased shipments from the US and China, these have not been sufficient to compensate for the losses.

Inventories offer little buffer ahead of the winter season. US diesel stocks concluded September at a 14-year seasonal low, while European commercial gas oil inventories hit a 25-year low in July. In response, G7 leaders pledged on October 2 to expedite the IEA's coordinated emergency stock release, with a priority on diesel supplies. Approximately 96 million barrels out of the 400 million pledged in March are yet to be released.

The IEA forecasts that increased refinery output will lead to a seasonal surplus in the diesel market by early next year. However, this recovery is deemed insufficient to replenish the inventories depleted during the conflict. While Gulf crude exports saw a sharp rebound last month, rising by 4.4 million bpd to 13.9 million bpd, refined products and liquefied petroleum gas shipments have recovered at a much slower pace, remaining below half their pre-conflict volumes. The IEA cautioned that this recovery is fragile, citing the bombing of Saudi Arabia's East-West Pipeline on September 11 and escalating Houthi attacks on regional energy infrastructure and shipping.

North Sea Dated crude was trading near $134 a barrel at the time of the report, reflecting heightened supply risks and record freight costs. Global observed oil inventories were 509 million barrels below pre-conflict levels at the end of September, leaving markets vulnerable to further disruptions.

In light of these challenges, the IEA has revised its 2027 oil demand forecast downward by 630,000 bpd and downgraded its global economic growth outlook by 0.4 percentage points to 3 percent, as central banks implement interest rate hikes to combat war-driven inflation. Global oil consumption is now expected to increase by two million bpd next year but will remain 620,000 bpd below 2025 levels. For 2026, demand is projected to decrease by 2.6 million bpd to 102.4 million bpd, with diesel accounting for approximately a quarter of this decline. The agency also reduced its global supply forecast for this year by 60,000 bpd to 100.7 million bpd, a decrease of 5.8 million bpd from 2025. Output is anticipated to rebound by 7.7 million bpd in 2027, though this recovery remains susceptible to renewed disruptions in the Gulf.