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Severely low diesel supply threatens to exacerbate inflation

A severely low supply of diesel in the U.S. and the world is likely to raise fuel costs and worsen inflation, raising concerns as the cold weather months approach.

“The national numbers for distillates are pretty tight,” said Patrick De Haan, head of petroleum analysis at GasBuddy.

“It’s uncomfortable. That doesn’t mean you’re going to see widespread power outages, but if we get a bout of cold weather, things could be challenging.”

Analysts say a confluence of factors, long bubbling under the surface, is now coming to a head as colder temperatures fuel more seasonal demand for diesel, a fuel that powers trucks and buses and is also used for heating.

“This is the start of the heating oil season. This is when demand really starts to pick up as we head into the winter months,” said Debnil Chowdhury, head of North and Latin American refining and market research at S&P Global Commodity Insights.

The country has approximately 25 days of diesel left, a level that is considered very low. De Haan said that normally the country̵[ads1]7;s supply is closer to the “low to mid-30s” in terms of the number of days remaining.

Much of the country’s attention has been focused on petrol prices, which have fluctuated throughout the year. They have generally fallen in recent months after peaking at $5 a gallon in June.

Petrol and diesel are products made from oil, and oil prices skyrocketed after Russia’s invasion of Ukraine.

A confluence of factors has also strained the diesel markets.

Those factors include reduced refining capacity due to the pandemic, increased demand amid recovery from COVID-19 and Chinese export quotas, Chowdhury said.

“Diesel demand came back much faster than other products. There are refineries closing all over the globe, so the ability to deliver was hampered, he said. “And finally, China, which is a major diesel exporter … was not able to export.”

“All of these things combined meant that the world was really low on inventory,” he added, also citing a recent surge in demand for jet fuel, which may have to compete with diesel at the refinery.

He added that the response to Russia’s invasion of Ukraine has also played a role in redirecting trade in the fuel as many European countries shun Russian products, creating market inefficiencies.

In addition to the long-term refinery shutdowns, De Haan also highlighted some recent outages in the Midwest.

“The fire in northwest Indiana and now … the shutdown of BP’s Toledo refinery, those are refineries that produce a lot of diesel because they process a lot of heavy Canadian oil, so that doesn’t help the situation at all,” he said.

Analysts say this crisis is expected to worsen persistently high inflation not seen in the past four decades. High diesel prices can increase shipping and heating costs.

“The rising cost of diesel therefore affects everyone, as diesel prices directly affect production, transportation and heating costs. As diesel prices rise, so do the costs of goods that are generally passed on to consumers,” Wood Mackenzie analyst Suzanne Danforth said in a written statement. to The Hill.

Danforth added that this could also help push the country into recession, as rising prices could dampen demand for products.

“Higher diesel prices have the potential to create even stronger inflationary pressures, especially if current price increases are sustained, adding significant downside risks to demand and increasing the chances of a global recession,” she said.

However, she also noted that if the economy slows, that could also help bring diesel prices down.

But the effects of heating costs may not affect Americans evenly. Fuel oil is used most in the north-east, and that region can be hardest hit by large electricity bills.

The Biden administration, for its part, has tried to put pressure on the industry to increase the supply of diesel.

In a recent interview with Bloomberg, National Economic Council Director Brian Deese called inventory levels “unacceptably low” and called on the industry to build up inventories.

Energy Minister Jennifer Granholm urged the industry to cut exports of “refined products” that include diesel and petrol in recent weeks, arguing that the supply is needed from the state.

However, the industry has pushed back, arguing that exports are important to maintaining global supplies, especially amid disruptions caused by the conflict in Ukraine.

“Reducing global supply by limiting US exports to build region-specific inventory will only exacerbate global supply shortages,” ExxonMobil’s CEO reportedly wrote to the Biden administration last month.

All in all, Chowdhury said, there are limited options to fix the problem.

“This is a difficult crisis to get out of,” he said.

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