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The market for diesel fuel is in dire straits with thin inventories and fewer options to hedge. 

Diesel supply is over 20% below the average for this time of year because of the ban of Russian diesel and reduced global diesel refining capacity due to climate change concerns. Airlines are already facing sharply higher fuel costs and manufacturers and shippers must be prepared for a period of extreme supply tightness.

A burgeoning squeeze play is happening in the May ultra-low sulfur diesel contract as buyers are becoming desperate with inventories that are hard to find. And if you find them, they are hard to hedge because of the wide spread between the front month and the back end of the curve. I have real buyers that can’t purchase because of the risk of not being able to hedge it.

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We are getting mixed signals whether the European Union is going to put new sanctions on Russian oil and further sanctions on Russia could create more concerns about a diesel shortage, another catalyst to drive prices higher. National World reported that drivers in parts of England have been reporting diesel shortages at fuel stations. The areas most affected by diesel shortages are in the southeast of England, but motorists have reported not being able to find diesel at fuel stations in regions such as Birmingham, the Black Country, Worcestershire and Staffordshire.

Earlier this week, Russia had to offer their crude at a record discount on their select contracts as it was hard for them to find buyers. So maybe some of the buyers of Russian crude have a conscience or maybe some sanctions may be starting to hurt Russia. At least in a small way, regardless, we know that Russia is still getting a lot of money from places like China and India, as those countries continue to buy Russian oil. Europe of course, continues to buy oil and they’re still paying for it in euros and funny Russia is still taking that money.

What is clear is that the world can’t afford to lose more diesel. Reports of a fire in Ukraine Monday helped aid the squeeze. Reuters reported details of a large fire that erupted in the early hours of the morning at an oil storage facility in the city of Bryansk 154 km (96 miles) northeast of the border with Ukraine. 

The market also is wondering if they overplayed the China lockdown fears. China also can squeeze buyers of their products and use the excuse of a COVID lockdown.

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Adding insult to injury, natural gas is back on a tear after winter weather hangs on and exports are being maxed to the limit. We believe that natural gas production is going to fall short of demand at the same time we’ve been writing about a potential diesel shortage this summer.