Diesel supplies face the threat of critical shortages as peak winter demand draws near amid constrained refining capacity, with one energy market analyst warning that sustained high oil prices could drive the risk of recession higher.
Energy markets have experienced a rollercoaster year amid supply disruptions brought by global conflicts and geopolitical tensions, sending the benchmark Brent crude across the 100-dollar-per-barrel threshold.
Stephen Schork, founder and editor of the Schork Report, a daily newsletter offering insights into the energy cash and derivatives markets, shared his outlook in an interview with the China Global Television Network (CGTN) on Wednesday.
Schork noted the more immediate concern is not crude oil itself but refined petroleum products, as crude must first be processed into diesel and other fuels for end use. He said the war in Ukraine has taken out a significant portion of Russia's refining capacity, while Europe lacks sufficient capacity to fill the gap.
"We have two wars. Yes, the war [between] Iran and the United States. But more importantly, as far as the refined products go, it is the war with Ukraine, because a significant amount of Russian refining capacity has been taken offline during this war," Schork said.
He explained this has left the United States as Europe's marginal supplier of diesel fuel, with the insufficient refining capacity necessary to produce the product pushing European prices substantially higher amid the shortage.
Schork noted more pressing challenges lie ahead as suppliers gear up for the colder months when demand will it hit its peak.
"We are coming out of the summer, which is the weakest demand part for diesel fuel. We are going into the fall, the winter, we are going into the peak season, looking at a significant shortage of supply and our ability to replenish that supply," he said.
Adding to those pressures, Schork said the U.S. has largely exhausted its usable holdings within the Strategic Petroleum Reserve, removing a potentially critical fallback amid rising tensions with Iran, while constrained refining capacity leaves few means to offset losses in the commercial market.
Schork stated the high prices can be resolved in only two ways: through increased supply or reduced demand. Producers could raise output to capitalize on elevated prices, but given refining constraints, that option remains limited. The only remaining path is demand destruction, a process where consumers are compelled to reduce spending, thereby increasing the likelihood of a recession, he warned.
"Here in the United States, diesel prices are approaching six dollars a gallon. That's unheard of, unprecedented. Gasoline prices are well on their (way) to hitting record highs. So we're already pushing the envelope to just how far the consumer can go. So if we see a sustained rally in oil over the next weeks, months, then certainly, what this means for inflation? Sky-high inflation. What this means for an economic downturn? Increase the odds immensely, the longer prices stay high at these levels," said Schork.
Oil prices, shortages could push economy toward brink of recession: analyst
