Global Diesel Shortage: ‘Major Crisis’ Is Already Here—And Getting Worse | Paul Sankey

Paul Sankey (0:00)

The tanker rates are at absolutely all-time record highs. So you'd have to say this is a highly inflationary environment. So at some point, some of these guys have to turn around, and if they don't, there'll be a risk of an accident. And in this state, with this much inventory, you know, almost none, in other words, that could be, you know, another massive upside to diesel prices that would be a huge shock. You're essentially out of marginal supply, and your farmers are gonna be running an extra 200,000 barrels a day of diesel, and they're locked in, they have to use it, they can't not harvest. So that's gonna be a very inflationary impact to the margin.

David Lin (0:31)

Welcome back to September 15th. Diesel prices have reached a new national record of $6.30 a gallon, according to AAA. WTI is above $106 per barrel this morning, and Brent crude is over $110 per barrel. Shipping through Hormuz remains severely restricted, with data showing just four vessels transiting through the strait on Monday. Saudi Arabia's east-west pipeline remains offline after drone attacks, disrupting a major export route that bypasses Hormuz. Estimates suggest it could take three to five weeks to repair. Meanwhile, Oman says two sailors are missing, and 23 were rescued after another attack on an oil tanker today. So it's a day before the FOMC raid decision, and the big question is what happens to the economy once the Fed hikes into a supply shock, and what our next guest says will be demand destruction coming next. Joining me now is Paul Sankey, lead analyst and president at Sankey Research. Paul has covered energy markets for more than three decades, beginning at the International Energy Agency. He was ranked the number one oil and gas analyst by institutional investor for three consecutive years, and built his career covering major oil companies and refiners. We'll discuss the diesel shortage, the refining crisis in America, record utilization rates, interest rates and strategic reserves, and of course the outlook for Middle East energy supply lines. And importantly, China's influence on crude prices and what could be next after China renews oil imports. Paul, welcome back to the show. Good to see you. Hey.

Hey to you, and thank you for coming on such a crazy time for the entire economy. Ten-year yield hit 5.04% today earlier in the day, and this is the highest level since 2007

With a Fed hike pretty much priced in on Wednesday, the question is whether or not oil has impacted the Fed's decision. The question becomes, what happens to the economy after the Fed hikes into historic highs for diesel and $100 for oil, WTI and Brent?

Does Fed chair wash potentially hike into an economy where we have really high prices for distillate products that would justify perhaps a hike, but what many are calling for a supply shock, they may cause a recession. What happens?

Paul Sankey (2:52)

Well, I think what you're going to see here is a continuation of high diesel prices, basically because of the chaos that we've got going on in oil. The first point there obviously would be Russia, Ukraine and the request apparently from the Trump administration that Ukraine stop bombing Russian refineries, didn't seem to last 24 hours according to press reports. So there's a concern and that did actually the announcement they had asked for a hole, did get diesel to gap down a little bit on Monday yesterday. But overall, the overnight attack that continued became a major concern for a market that was already very, very worried about the situation with Saudi Arabia. Saudi Arabia is a tough one because basically they're being attacked from both Iraq, the Shias in Iraq and those are the guys that have blown up the pump station on the East West pipeline. That's going to cost 5 million barrels a day of oil right there.

It seems to be initially there were reports that this was flaring. That was the Friday afternoon reports, but as of Monday has been confirmed by the Saudis themselves that the East West is shut down. Additionally, the Saudis are being attacked by the Houthis to their south.

And that obviously is an Iranian backed effort. So that's a complete mess. The one offset is that the MBZ, the head of UAE has said to be just have met the Iranian president. Not many people have missed that sort of dovish aspect of the market. But broadly speaking, we're probably at the level of tank bottoms for distillate in the US, which is why the price is just rising aggressively now because you're essentially out of marginal supply and you are looking, as he referenced David, demand destruction pricing now right as we go into harvest. So harvest season is upon us. Farmers are going to be running an extra 200,000 barrels a day of diesel, and they're locked in. They have to use it. They can't not harvest. So that's going to be a very inflationary impact to the margin. So if this is a tough one and it's unfortunate to have to say that the whole moose situation is almost deteriorating since February at this point.