Big drop in benchmark diesel occurring as warnings grow of tougher conditions to come

The latest jump in prices in futures and at the retail level is coming as some analysts are predicting that conditions for consumers are more likely to get worse before they get better.

S&P Global Energy, in a recent analysis, said the oil market now features two things that theoretically should not happen in parallel: a decline in inventories and a drop in demand.

As S&P Global Energy said in the analysis, those “seemingly contradictory developments occurring in tandem shows that the full severity of the greatest supply disruption in history is yet to come.”

Biggest fall in demand since COVID

The demand decline in the second quarter is expected to total about 5-million barrels/day off a base of 103- to 104-million barrels of global demand, according to S&P. It’s the largest decline since COVID hit in 2020. That collapse in consumption was likely to have been as much as 20-million b/d.

As a result of the second quarter decline, and possibly more beyond that, global petroleum liquids demand (a figure that includes such products as propane and biofuels) is likely to decline by 2-million b/d this year, S&P Global said. Declines in that number on an annual basis are extremely rare; it fell about 8 million b/d between 2019 and 2020 because of the pandemic, but has been positive since then. 

Even as demand is falling, the S&P Global Energy report said April had a “record-settling decline in global crude inventories.” That decline was about 6.6 million b/d and will average about 5.5 million b/d for the quarter, S&P Global Energy said.

“While there have been significant impacts to date, the oil market has remained somewhat cushioned from the full impact of the loss of 15 million barrels per day in supply,” Jim Burkhard, S&P Global Energy’s vice president and global head of crude oil research, said in the report. “That the cumulative supply loss is now approaching 1 billion barrels is a staggering figure that inventories cannot cover indefinitely. An inevitable market reckoning is coming.” 

No immediate relief from a strait opening

Reopening the Strait of Hormuz would not produce immediate relief, the report said. 

“S&P Global Energy expects that, if Hormuz were to be reopened, it would take an additional seven months at minimum to fully restore upstream production, assuming no permanent damage and supply chains operate smoothly,” the report said. “A recovery could take longer if there is damage to ports or other transport and loading infrastructure. The longer the strait remains closed, the more likely the supply crisis extends into late 2026 and into 2027.”

Burkhard’s warning to consumers was ominous. “What is a tremendous curtailment of demand is still being outstripped by the loss of supply,” he said. “That means that higher crude oil and refined product prices are still to come.”

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