US diesel prices hit new all-time high amid global supply disruptions, strong demand

US diesel prices shattered records on Sept. 15, as geopolitical tensions and supply disruptions combined with surging demand pushed prices to their highest levels ever.

US Gulf Coast ultra-low sulfur diesel prices surged to a new all-time high of $5.182/gallon on Sept. 15, marking a sharp 27.05-cent/gal day-over-day jump. This eclipses the previous record set just days earlier, on Sept. 10, when prices reached $5.0125/gal.

Platts, part of S&P Global Energy, assessed the Chicago Pipeline ULSD differential up 27.50 cents/gal from the previous day to a 9.5-cent/gal premium to October futures. The outright price surged 57.55 cents/gal to its record high of 535.70 cents/gal.

And in Linden, New Jersey, Colonial Pipeline ULSD delivering off Line 3 rose 29.05 cents/gal to 534.95 cents/gal, also an all-time high.

The rally in physical diesel prices was mirrored in the futures market, with the NYMEX ULSD front-month contract also hitting a record high of $5.262/gal. The previous futures contract record was set in April 2022. The spike in futures was triggered by escalating geopolitical tensions, as Ukrainian drones struck the Syzran Oil Refinery in Russia's Samara Oblast in the early hours of Sept. 15, according to local media outlets, fading market hopes of a genuine resolution between the two countries.

Adding to the supply woes, Saudi Arabia's East-West pipeline, with a 7 million b/d capacity, was temporarily shut down on Sept. 11 as a precaution after multiple attacks on the crude system, according to a Sept. 11 statement by the Saudi Press Agency. These combined disruptions have tightened the prompt supply of refined products worldwide, driving spot prices higher and steepening market backwardation.

Backwardation, the phenomenon in which spot prices exceed futures prices, is now at its widest in over five months, with NYMEX October ULSD futures 25.20 cents/gal pricier than November futures. This steep backwardation discourages traders and producers from building inventories, as storing diesel becomes less attractive when its future value is lower than its current value.

US inventory levels reflect this dynamic. According to the latest Energy Information Administration data released Sept. 10 for the week ended Sept. 11, stocks sit at 96.4 million barrels, well below the symbolic 100-million-barrel mark and significantly lower than the five-year average of 112.4 million barrels for the same period.

Meanwhile, domestic demand for diesel has surged. The EIA reported a nationwide increase of 288,000 b/d, bringing total demand to 3.678 million b/d, slightly above the five-year average. Despite this uptick in domestic consumption, global diesel demand remains even stronger, keeping arbitrage incentives open and exports at full throttle.

According to S&P Global's latest ArbFlow report, the US Gulf Coast-Europe arbitrage was open at $4.12/b, with an average of $2.88/b for September. The arbitrage to the Mediterranean climbed to $5.38/b, its highest level since Aug. 24. Meanwhile, S&P Global Energy's Commodities at Sea data indicates that September export activity is holding steady at 1.7 million b/d, matching August's all-time export high.

Amid global supply disruptions, strong domestic and international demand, and historically low inventories, the US diesel market is experiencing sustained upward price pressure.