Diesel in Focus: Supply, Biofuels and What Traders Are Saying

Oil traders are bullish on diesel, as Ukrainian attacks on Russian refineries threaten to tighten global supply. Funds and money managers currently hold the largest number of bullish bets on European diesel prices since February 2022.

Russia remains one of the world's foremost diesel producers and suppliers. And with fuel prices hitting record highs in Russia, the country is considering restrictions on diesel exports. If adopted, a ban would likely only affect resellers of Russian diesel (i.e. those who buy diesel inside Russia then ship it abroad). However, since the majority of Russia's diesel cargoes come directly from the fuelmakers themselves, impact on global markets might be muted in comparison to a full-scale export halt.

Nevertheless, the prospect of a ban comes at a time when diesel's crack spread (the margin between diesel prices and crude prices) in Europe is already higher than its seasonal average, signalling supply pressures. Indeed, Russian export data is now showing new seasonal lows on distillate outputs.

Towards the end of Q2 2025, we saw significant shortages of distillates and inventory depletion. These fears have eased somewhat since, with stocks increasing particularly in the U.S. (see chart below), but also in Northwest Europe and Asia. Strong margins have incentivised refiners to boost crude processing and increase diesel and gasoil yield.

(Source: EIA data)

Why did US Distillate inventories drop so low in 1H 2025?

To understand we need to look at biodiesel and renewable diesel. In the U.S., according to EIA data, renewable diesel and biodiesel supply dropped by 124,000 b/d in 1H 2025, compared with the same period in 2024, driven by lower domestic output and a decade-low level of imports following federal tax-credit changes.

In order to plug the gap, demand for petroleum-based distillate increased, and indeed petroleum distillate demand rose by 170,000 b/d. This did not all come from new production, some was drawn from storage. Further pressure on inventories was added by higher than average distillate exports due to strong international demand. This has particularly come from European hubs as a replacement for disrupted Russian products. Thus, even less domestic production stayed in U.S. tanks, accelerating the drawdown.

Is the US Distillate inventories rebound enough?

Whilst the chart above shows that US distillate inventories have picked up, they still remain low on a relative basis, and indeed the EIA forecasted this week that US total distillate inventories will end 2025 and 2026 at multi-year lows. The agency attribute this to significant inventory draws in 2025 and strong export demand, and declines in domestic production resulting from refinery closures.

Another key factor is a decline in domestic production resulting from US refinery closures. The LoyndellBasell Houston refinery shut down in early 2025, and another two refineries in California with a combined 284,000 b/d refining capacity plan to close over the next two years. This loss of refining capacity will reduce output available to restock distillate inventories.

What is the impact of low distillate inventories?

Essentially, low inventory levels elevates the risk of higher prices and price volatility from supply disruptions, particularly when demand is high, such as the autumn harvest and winter heating season.

So what next?

The outlook remains in the balance. Refiners are running hard, inventories are partially rebounding and biofuel output will eventually recover as producers adapt to new tax credit structures. However, U.S. refinery closures, continued uncertainty in renewable diesel economics, and geopolitical risks all point to tightness ahead. Any disruption, whether from geopolitics, refinery outages or another drop in biofuel supply, will hit harder against already low stock levels.

Personally, I lean bullish on diesel. Even if U.S. inventories stabilise, global supply is fragile and geopolitical risks remain elevated. With seasonal demand spikes ahead, short-term disruptions or demand surges could drive further upside.

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