Diesel prices surged earlier this week after another Ukrainian attack on a Russian refinery and a Houthi strike on a Saudi refining facility. Global fuel supply is already unbalanced, and further refinery disruptions are likely to worsen the situation just ahead of peak demand season, when agricultural harvest activity and winter heating stockpiling typically push consumption higher.

Reuters reported Monday that refining margins in Europe jumped 10% from an already elevated level as refiners worldwide saw profits rise to record highs amid tighter supply caused by the war in the Middle East and Ukrainian drone attacks on Russia's refinery network.

In the United States, the report said diesel futures posted their sharpest increase since July on Monday, rising 7.4% to $4.19 per gallon. AAA data showed the average retail price for diesel at $5.32 per gallon on Tuesday, up from $4.88 a month earlier and $3.71 a year earlier.

Diesel is often described as the workhorse of the economy. It powers freight transportation, farming, and winter heating. Trucks move roughly 70% of all freight tonnage in the United States, making diesel a near-universal input cost for goods movement. If prices remain elevated for an extended period, the added costs are typically passed on to consumers, adding to broader inflationary pressure.

"Refining margins remain elevated because every additional barrel of product has become significantly more valuable than every additional barrel of crude," Kpler lead analyst for refining supply and modeling Sumit Ritolia told The Wall Street Journal this week.

Refining margins are hitting records this year. The Wall Street Journal said the 3-2-1 crack spread, a common benchmark that models the economics of refining three barrels of crude into two barrels of gasoline and one barrel of diesel, has risen to more than $70 per barrel, compared with a usual level of less than $20 per barrel.

Refineries have been running at unusually high utilization rates to offset lost supply from the Middle East and Russia, but there are clear limits to how much output can be increased. "Refinery utilization above 90-95% simply means there is very little operational flexibility left," Ritolia told the Wall Street Journal.

Exxon and Chevron recently reported utilization rates of 95% to 97%, while Shell reported utilization above 100%. Refineries are now entering maintenance season, which is important for fuel supply security but will also temporarily reduce output and could push prices higher.

Europe is facing a refinery shortage of its own. Refineries there have been closing for years as national governments and the European Union pushed a decarbonization agenda built around mass transport electrification. That transition has not fully materialized, leaving hydrocarbon demand substantial while domestic supply has declined. As a result, the EU has become more exposed to global energy markets and has seen its import bill rise.

Analysts expect refining margins to remain well above normal through the end of the year. Even if the war in the Middle East ended tomorrow — which appears unlikely — it would still take time for supply to rebalance, and Russia's ban on diesel fuel exports is not expected to be lifted until 2027.

China, which helped prevent a surge in global crude oil futures by cutting imports, is not expected to play the same role in fuel markets. The country has kept export restrictions in place, although it has eased them slightly, allowing refiners to export more fuels in August. The temporary relaxation will apply this month, and refiners may roll some volumes into September if they fail to secure purchase agreements for the full allocation.

That is unlikely to ease the global fuel crunch, much as record U.S. exports have not done so, despite filling part of the gap left by Russia and the Middle East. At the same time, U.S. diesel inventories have fallen to the lowest level for this time of year in 30 years, Reuters reported in its coverage of record diesel prices. That leaves the world's biggest oil and fuel exporter with limited room to increase shipments further to energy-hungry markets.

Adding to the concern, the U.S. Energy Information Administration said earlier this week that some oil production in the Middle East could remain shut in well into 2027, and possibly until the end of the year. That points to a prolonged squeeze in both crude oil and fuel supplies.

Such conditions could accelerate transport electrification, but higher fuel costs may also weigh on demand for electric vehicles if inflation spreads across industries, including EV manufacturing and sales.

By Irina Slav for Oilprice.com