Regan Brown
Diesel prices are influenced by several factors, including the cost of crude oil, supply and demand dynamics, refinery capacity, and geopolitical tensions. In 2024, diesel prices in the US witnessed a downward trend, with the EIA projecting a further decrease in 2025 due to increased refinery capacity and a slight reduction in consumption. However, the conflict between Israel and Iran, along with potential disruptions to international trade, could lead to unexpected spikes. As we progress through 2025, various factors will determine whether diesel fuel prices will continue to fall or rebound.
| Characteristics | Values |
|---|---|
| Diesel prices in 2024 | Continued a two-year decline |
| Diesel prices in 2025 | Expected to average $3.50 per gallon, down 5% from the previous forecast |
| Factors influencing prices | Crude oil prices, supply restrictions, demand outlooks, refinery shutdowns, disruptions to international trade, logistical bottlenecks |
| Diesel demand | Globally waning, particularly in China |
| Impact on freight costs | Higher diesel costs lead to higher freight costs for shippers |
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What You'll Learn
The impact of refinery shutdowns and geopolitical tensions
Refinery shutdowns and geopolitical tensions have a significant impact on diesel fuel prices. In the United States, refinery utilization has decreased by 11% since early January 2024, with a more pronounced drop in the Midwest and Gulf Coast regions. This has resulted in decreased inventories of both motor gasoline and diesel fuel, leading to upward pressure on prices. Maintenance shutdowns at refineries like Motiva Port Arthur and Marathon Galveston Bay, which account for about 7% of total US capacity, have contributed to this decline.
Geopolitical tensions, such as the US-China trade war, the dispute over the Diaoyu/Senkaku Islands, and the Israel-Iran conflict, also play a crucial role in diesel fuel prices. These tensions create uncertainties and risks, affecting supply chains and shipping networks. For instance, the recent attack on Iran's oil and gas facilities by Israel led to a spike in Brent crude oil prices, which could further increase consumer diesel prices.
The relationship between geopolitics and fuel prices is sensitive, with even the threat of disruption impacting the market. Geopolitical risks, such as acts of terrorism, economic sanctions, and armed conflicts, can cause price volatility and affect the cost of transportation for shippers. Additionally, the COVID-19 pandemic has introduced new dynamics, with supply and demand considerations taking precedence over geopolitical influences in 2020.
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The role of crude oil prices and demand
The cost of crude oil is a significant factor in diesel fuel pricing. From 2004 to 2023, crude oil prices accounted for about 50% of the monthly average US retail on-highway diesel fuel prices. Crude oil prices are influenced by worldwide demand and supply, with world economic conditions contributing to the demand for petroleum products derived from crude oil. The price of diesel fuel, as a major transportation fuel, tends to follow these economic trends.
Crude oil prices are impacted by various geopolitical and market factors, including supply and demand dynamics, inventories, seasonality, financial market considerations, and expectations. For example, geopolitical turmoil, such as the conflict between Israel and Iran, can influence crude oil prices and subsequently affect consumer diesel prices.
Demand for diesel fuel is relatively consistent in the US and generally reflects the overall economic health. However, diesel fuel prices can fluctuate seasonally, influenced by factors such as demand for heating oil during fall and winter, and variations in demand from the agricultural sector.
The cost of doing business for diesel fuel retailers also impacts pricing. Factors such as overhead costs, local real estate costs, taxes, and competition from nearby retail stations can affect diesel prices. Additionally, transportation costs increase with the distance from the source of supply, which is predominantly the Gulf Coast in the US.
While diesel fuel prices have been projected to decrease in 2024 and 2025 due to increased refinery capacity and production, several uncertainties can impact these forecasts, including unplanned refinery shutdowns, disruptions to international trade, and logistical bottlenecks.
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Diesel demand in China
Diesel fuel prices are expected to decrease in 2024 and 2025 due to increased production and reduced strain on U.S. and global inventories. However, this may not hold true if there are additional unplanned refinery shutdowns or further disruptions to international trade flows.
Now, focusing on China, diesel demand in the country is expected to peak or may have already peaked. Diesel demand in China is linked to economic activities, particularly in the construction and property sectors, as well as trucking activity.
China's crude oil imports are expected to peak as transport fuel demand declines. China's transition to electric mobility has been rapid, with EV and hybrid sales surpassing combustion engine vehicle sales in July 2024. This shift has reduced the country's need for crude oil to produce gasoline.
In addition to the rise of EVs, China's diesel demand has also been impacted by an economic slowdown, particularly in the property sector. The replacement of diesel trucks with cheaper gas-fired vehicles and LNG trucks has further contributed to the decline in diesel consumption.
According to the U.S. Energy Information Administration, China's diesel consumption totaled 3.9 million barrels per day in June 2024, an 11% decline from the same month in 2023. This was the largest year-over-year decline since July 2021. The slowdowns in trucking activity and construction have directly contributed to the reduction in diesel consumption.
Analysts from various organizations provide different projections for the peak of China's diesel demand. FGE believes it peaked in 2022, while the IEA stated it peaked in 2023 at 3.7 million bpd. S&P Commodity Insights predicts the peak will occur in 2027, surpassing 4 million bpd.
In conclusion, diesel demand in China is expected to peak or has already peaked due to the rise of EVs, economic slowdowns, and the replacement of diesel trucks with alternative fuel vehicles. The transition to electric mobility and reduced diesel consumption have significant implications for the global oil market.
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Diesel's impact on freight pricing
Freight shipping costs and diesel fuel prices are closely linked. Diesel fuels three of the four major transportation methods: truck, rail, and container ship. As diesel prices rise, shipping costs also rise. This is because carriers must increase their prices to avoid losses. This increase in shipping costs is then passed on to the consumer in the form of higher prices for goods.
Carriers typically institute surcharges for fuel based on how far above the baseline fuel prices rise. For truckload and intermodal mileage-based surcharges, the general rule is a fuel surcharge of one cent for every six cents the diesel price rises above the projected baseline. In other cases, a percentage-based surcharge is used. These surcharges are designed to protect carriers against unexpected rises in fuel prices.
The price of diesel fuel is influenced by various factors, including the cost of crude oil, which accounted for about 50% of the monthly average U.S. retail on-highway diesel fuel prices from 2004 through 2023. International demand for distillate fuel also affects U.S. diesel fuel prices. During the fall and winter, the demand for heating oil, which is produced at the same time as diesel fuel, can put additional pressure on diesel fuel prices. Seasonal swings in farmers' demand for diesel fuel can also influence prices in certain regions.
Additionally, transportation costs tend to be higher in areas farther from the Gulf Coast, which is the source of about half of U.S. diesel fuel production. Diesel fuel prices on the West Coast, particularly in California, are also higher due to taxes and supply issues. Overall, diesel fuel prices can fluctuate throughout the year and are influenced by economic trends and international demand.
Looking ahead, the U.S. Energy Information Administration (EIA) expects average U.S. diesel prices to decrease in 2024 and 2025 due to increased refinery capacity and production from the Middle East, particularly Kuwait. However, it is important to note that this forecast is subject to uncertainty, and unexpected events or disruptions could impact diesel prices.
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Refinery maintenance activities
In the United States, for example, the U.S. Energy Information Administration (EIA) has noted that reduced refinery activity can put upward pressure on diesel prices. In early 2024, a sharp decline in refinery utilization in the Midwest and Gulf Coast regions, partly due to planned maintenance, contributed to decreasing regional inventories and increased retail prices for diesel fuel.
On a global scale, refinery maintenance activities can also influence diesel prices. For instance, in December 2024, Reuters reported that refineries in Singapore, northwest Europe, and the U.S. Gulf were recovering from maintenance shutdowns, which had impacted margins in these key energy hubs. The return of refineries like Saudi Arabia's Yasref and Kuwait's Al Zour from maintenance in the same month was expected to boost diesel supplies from the Middle East.
Looking ahead, refinery closures and maintenance activities are expected to continue influencing diesel prices. JP Morgan forecasts that refinery shutdowns will outpace demand contraction, with European diesel margins projected to trade at $17-$19 per barrel in 2025 and rise to $21 in 2026. Additionally, traders and analysts predict that the closure of about 1% of refining capacity worldwide in 2025 will provide price support for global diesel markets.
Overall, refinery maintenance activities play a crucial role in the diesel fuel market. While they are essential for the reliable functioning of refineries, they can also lead to temporary disruptions in supply, affecting diesel fuel prices in the short term.
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Frequently asked questions
Yes, according to the U.S. Energy Information Administration (EIA), diesel prices are expected to decrease in 2024 and 2025 due to increased refinery capacity and a decrease in global oil demand growth.
Diesel prices are primarily determined by the cost of crude oil, which regularly accounts for around 50% of end consumer prices. Other factors include supply restrictions, demand outlooks, refinery shutdowns, disruptions to international trade flows, and logistical bottlenecks.
Diesel prices significantly impact the freight market as diesel powers almost all freight movement globally. Higher diesel costs result in higher freight costs for shippers, which can lead to increased shipping rates or fuel surcharges passed on to consumers.
