Oil Markets at a Breaking Point as Storage Runs Dry | Rory Johnston

Europe’s underfilled gas inventories leave it exposed to a cold winter: because gas and diesel can substitute in heating, stronger diesel demand and prices could follow if temperatures are low. The risk is especially acute because high gas prices can also drive users toward diesel.

China’s apparent oil-demand weakness may be less severe than headline import data suggest. Crude imports have recovered from their June–July lows, while refinery run cuts explain roughly 3 million barrels per day of the 5.5 million-barrel-per-day import reduction and inventory drawdowns may account for part of the remainder.

The roughly 20% decline in China’s apparent diesel consumption is difficult to reconcile with road-freight activity rising 3.5% year over year: electrification was on pace to displace about 500,000 barrels per day, but new-energy vehicles were only about 12% of the fleet. Johnston therefore identifies diesel as a plausible strategic-stockpiling candidate because it is easier to store and more shelf-stable than gasoline.

China’s recovering crude imports, at roughly 7–7.5 million barrels per day, remain 3.5–4 million barrels per day below pre-war levels and have shifted toward unsanctioned market oil. The loss of roughly 1.5 million barrels per day of Iranian and Venezuelan supply increases competition for benchmark-quality crude, while Johnston argues that earlier estimates of Chinese inventory building were overstated.

The diesel shortage reflects simultaneous supply losses of roughly 1 million barrels per day from the Middle East and about 90% lower Russian diesel exports after attacks left as much as half of Russia’s refinery fleet offline. Higher U.S. exports, from about 1 million to 1.5 million barrels per day, partially offset the shortfall, but diesel remained more volatile than crude as its crack spread fell from above $115 to $94 per barrel in two weeks.