Global diesel squeeze to drag into 2027, IEA says

Global diesel supplies are expected to remain tight well into next year as Middle East fuel exports struggle to recover despite a recent rebound in crude shipments, the International Energy Agency said.Increased flows through the Strait of Hormuz helped lift global supply estimates for the third quarter.Supply fell by 1.7 million barrels a day in the third quarter, as the Iran war curtailed flows through the Strait of Hormuz—a critical waterway carrying large volumes of Gulf oil and refined products—while Russia, one of the world’s largest exporters of refined fuels, had to cut output due to Ukrainian attacks on its refineries.Diesel is a key part of the global economy, fueling trucks that move food and manufactured goods, heavy equipment at construction sites and ships at sea. It is also widely used for heating.The IEA—a group of Western nations and their allies—said global gasoil exports averaged 4.7 million barrels a day in the first nine months of 2026, down 10% from a year earlier. In September, combined net exports from the Middle East and Russia fell more than 60%, with increased shipments from the U.S. and China offering only partial relief.Refiners initially benefited from exceptional margins as diesel prices surged relative to crude, but soaring tanker rates and rising crude delivery costs have since eaten into profitability.European diesel refining margins fell from around $100 a barrel to close to $60 by early October, according to the IEA.Prices have eased from September’s record highs of more than $200 a barrel, yet remain nearly double the price of crude and their prewar levels, raising costs for businesses and consumers.High prices are curbing consumption, but not enough to make up for lost supply. Global diesel consumption fell by 1.1 million barrels a day in the second quarter and a further 750,000 barrels a day in the third, to 28.7 million barrels a day.Inventories, meanwhile, offer little cushion. The global gasoil market shifted to an estimated deficit of about 100,000 barrels a day in the third quarter, compared with a surplus of 880,000 barrels a day a year earlier and an average seasonal surplus of 300,000 barrels a day over the past five years. The IEA expects stock draws to accelerate in October as winter demand rises and refineries undergo seasonal maintenance.A recovery in refinery output is expected to return the market to a surplus in the first quarter of 2027, allowing inventories to rebuild broadly in line with normal seasonal patterns. But that would do little to erase the shortfall accumulated this year: without a sustained recovery in Middle Eastern product exports, further demand cuts might be needed to rebalance the market, the IEA said.The Group of Seven major economies pledged to accelerate the release of oil supplies agreed on in March, prioritizing diesel deliveries in the coming weeks, while President Trump said he struck a diesel-supply deal with Russia. However, easing Russian diesel export restrictions is unlikely to materially improve supply while refinery capacity remains impaired, and fresh disruptions could tighten the market further.In its latest monthly report, the IEA further trimmed its outlook for global oil demand, reflecting the economic fallout from the conflict and high energy prices. The agency now expects consumption to fall by 2.6 million barrels a day in 2026 to 102.4 million barrels a day, and to return to growth only in March next year.Global oil supply rose by 2.5 million barrels a day in September, driven by Gulf producers—particularly Saudi Arabia and the United Arab Emirates. Still, the IEA expects supply to decline by 5.8 million barrels a day in 2026.Global observed oil inventories fell by 10 million barrels in September, as a 113-million-barrel drawdown in on-land stocks was partly offset by a 103-million-barrel increase in oil on water.For 2027, the IEA expects oil demand growth of 2 million barrels a day, while supply is projected to rebound by 7.7 million barrels a day. OPEC and its allies should account for 5 million barrels a day of the increase, with producers outside the group contributing another 2.7 million barrels a day.Middle East crude exports rebounded sharply in September, reaching more than 75% of prewar levels. Increased flows through the Strait of Hormuz and the rapid restoration of Saudi Arabia’s East-West pipeline exports helped lift global supply estimates for the third quarter.But the recovery is increasingly fragile, as renewed attacks on energy infrastructure and tanker traffic threaten to disrupt shipments, while security risks and record tanker rates raise delivery costs and squeeze refinery margins, the IEA said.A prolonged conflict has also raised the risk of a fresh wave of energy-driven inflation, as higher fuel costs filter through to households, companies and the wider economy. Brent crude, the global oil benchmark, was trading above $106 a barrel in early European trading Wednesday, while West Texas Intermediate hovered around $94 a barrel.Write to Giulia Petroni at giulia.petroni@wsj.com