Uche Cecil Izuora
Prolonged Middle East Crisis is expected to further accelerate diesel market disruptions.
According to Oil Market Outlook published by the International Energy Agency (IEA) globalgasoil markets tightened counter-seasonally in 3Q26, as prolonged disruptions to Middle Eastern and Russian exports forced stock draws.
Combined with much heavier-than-normal inventory declines in 2Q26, this has deprived global gasoil markets of crucial stock cover ahead of the peak winter demand season, says the report.
Higher prices have weakened demand as consumers deferred price-sensitive heating oil purchases, it said.
Conversely, relatively price inelastic diesel demand has remained strong, supported by government measures aimed at easing the impact of high prices on consumers. Falling inventories, soaring cracks, and steepening levels of backwardation have signalled the need for additional supplies. However, even with a rapid recovery expected in refinery throughputs into year-end, gasoil supply falls short of meeting demand in 4Q26, suggesting that the replenishment of lost inventories, outside of typical seasonal fluctuations, is unlikely before 2H27.
According to the IEA, wholesale diesel prices exceeded $200/bbl in Singapore in mid-September and reached all-time highs of around $220/bbl in Europe and the United States. Retail diesel prices have risen in tandem to record levels in most major economies. Higher product prices relative to those of crude led to exceptionally strong refinery margins in 3Q26, as record Atlantic Basin diesel and jet fuel cracks offset the drag from heavily negative fuel oil and naphtha cracks. However, as freight rates soared and the delivered cost of crude rose sharply in September, diesel cracks for European refiners dropped back from $100/bbl to close to $60/bbl by early October (see Surging Freight Rates Cut into Refining Profitability). As tensions in the crude freight market have spread to other tanker categories, delivered diesel prices in the dominant gasoil importing markets – Europe, Africa and Latin America – could rise again in the coming weeks.
Global diesel demand it noted is deeply intertwined with economic activity, rendering it relatively price inelastic. Nevertheless, sky-high prices, combined with a deterioration in the economic outlook in several countries, have reduced deliveries.
A drop of 1.1 mb/d y-o-y in 2Q26 to 28.5 mb/d – with China and Europe accounting for the lion’s share of the decline – was followed by a contraction of 750 kb/d y-o-y to 28.7 mb/d in 3Q26. Gasoil deliveries outside the transport sector have weakened markedly since the onset of the war, with consumption in the Organisation for Economic Co-operation and Development (OECD), countries falling by 8 per cent y-o-y in the five months to July.
Also, the OECD diesel deliveries fell by just 2 per cent across the same period. But while the deferral of heating-related purchases has slowed other gasoil demand to date, tanks must be filled ahead of the Northern Hemisphere winter. Even so, gasoil demand’s year-on-year contraction is forecast to accelerate to 1 mb/d in 4Q26.
Since the start of the Middle East conflict, gasoil supply has contracted sharply following reductions in Middle East refinery activity and lower product exports from Asia. Global gasoil production decreased to an average of 26.4 mb/d in 2Q26, 1.5 mb/d lower than a year ago, while 3Q26 output is estimated to have dropped by 1.7 mb/d y-o-y to 27.2 mb/d. The concurrent loss of Hormuz crude flows significantly lowered refinery runs in Asia, cutting gasoil output in 2Q26, particularly in China, India and Korea. Amplifying these losses, Russian gasoil production and exports have slumped in recent months due to increasing damage to refineries from Ukrainian drones (see September OMR, Russian Refining System Resiliency Degraded by Ukrainian Attacks). Furthermore, tight jet fuel markets this summer encouraged refiners to maximise kerosene production, thereby reducing gasoil yields. Finally, crude market supply disruptions have necessitated refineries to process crude grades that are suboptimal for their configurations, as access to preferred feedstocks has been restricted.
Reduced refinery output sharply lowered global gasoil exports to an average 4.7 mb/d over the first nine months of 2026, 10 per cent below year-earlier levels.
Preliminary trade data show flows falling to 4.7 mb/d in September, nearly 700 kb/d below a year ago. Combined net exports from the Middle East and Russia dropped by 1.3 mb/d to 820 kb/d in September, down more than 60% y-o-y.
While the United States and China increased exports by 610 kb/d compared with year-earlier levels, volumes fell by 150 kb/d from their August peak, failing to offset the Middle East and Russia losses.
With supply losses outpacing weaker demand, inventories have continued to decline. Total OECD gasoil stocks drew counter-seasonally to 565 mb in July, down 5% from pre-conflict levels and their lowest level since November 2023 when inventories were still being replenished following the 2022 energy crisis.
The global gasoil balance is estimated to have tightened by around 100 kb/d in 3Q26, compared with last year’s build of 880 kb/d and the five-year average of +300 kb/d ahead of the Northern Hemisphere heating season. Inventory draws are projected to accelerate in October as demand rises seasonally while the refining system undergoes regular maintenance work. The recent tightening of crude markets and record freight rates have crushed refining margins outside North America. Any further deterioration in refinery profitability could prompt economic run cuts at marginal refineries in Asia and Europe, increasing market tightness before the end of the year.
The projected recovery in refinery runs towards year-end should almost keep pace with the more cautious 4Q26 demand forecast. However, the outlook remains fragile, and any unexpected disruptions, such as a late-season US Gulf Coast hurricane, could further tighten the market. The recently announced easing of Russian diesel export restrictions is unlikely to materially alter the global gasoil market balance as the current export constraints stem from a lack of operational Russian refinery capacity.
Concerns of possible disruptions to Chinese product exports, which have been a key source of supply to Asian markets in 3Q26, were alleviated by the resumption of government licence issuance in recent days.
Higher global refinery output will return the gasoil/diesel market to a surplus in 1Q27, lifting stocks broadly in line with normal seasonal patterns. However, this will be insufficient to offset the deficit accumulated during 2026. As a result, the gasoil market balance will remain tight well into 2027 and is dependent on a recovery of product supply from the Middle East. Failing this, further demand reductions and the heavy economic costs these will entail may be needed to balance markets.
Against this challenging backdrop, on 2 October, G7 leaders announced their commitment to accelerate the delivery of the agreed volumes under the IEA Collective Action of 11 March, with the priority on the speedy release of diesel supplies to the market in the coming weeks.