The diesel market is experiencing extreme volatility, dropping sharply then rebounding on geopolitical news. With inventories critically low and refining capacity still a concern, experts warn of potential price spikes. Get the latest on heating oil demand and the factors keeping the market on a knife edge.
Ultra-low sulfur diesel on the CME exchange plunged 25.45 cents per gallon on the December contract in a single session after loose talk of U.S.-Iran peace discussions circulated on social media, only to rebound 10 to 11 cents the following day when Iranian officials said no agreement was any closer. The weekly Department of Energy benchmark, published the morning of the interview, showed a more modest decline of $0.06 to $6.292 per gallon — but the intraday futures swings told a more dramatic story about market fragility.
The volatility matters to carriers, brokers, and shippers because it reflects structural tightness that analysts say will outlast any diplomatic development. Roughly 10 million barrels per day of global refining capacity has been knocked offline by attacks in the Middle East and Ukraine, and U.S. and international distillate inventories remain at extremely low levels heading into heating-oil season.
“The market is absolutely going to go down” if a genuine easing of conflict materializes, said John Kingston, who covers fuel markets. But he cautioned that any relief would likely be short-lived: “That doesn’t take away from the fact that longer term, after that kind of almost sugar high has worn off, you have inventories to refill. You have facilities that have to be rebuilt.”
“The most valuable barrel out there is the one that can give you the product now, right now, because now is when we need it.” — John Kingston
Kingston pointed to diesel’s continued steep backwardation — a market structure where near-term prices exceed future prices — as the clearest signal of how tight supplies are. In a well-supplied market, commodity prices rise gradually along the forward curve, a condition known as contango. The persistent reversal of that pattern in diesel indicates that buyers are paying a premium for immediate delivery, a dynamic backed up by weekly EIA inventory data.
On the refining side, two major deals this week illustrated just how valuable processing capacity has become. Valero announced it would purchase the shuttered LyondellBasell refinery in Houston — which has been offline for about three years and has more than 100,000 barrels per day of capacity — for roughly $350 million. On the same day, Marathon said it was selling two operating Midwest refineries, in Minnesota and North Dakota, to a company identified as CVI for over $4 billion. The stark price gap, Kingston noted, suggests the Houston facility will require substantial investment before it can contribute to supply. Jeffrey Currie, former head of commodities research at Goldman Sachs, separately observed that the Brent forward curve shows little price decline even a year out, reflecting deep market uncertainty about when and whether supply-demand balances will normalize.
Heating oil consumers in the Northeast face the sharpest near-term exposure. Kingston noted that heating oil and diesel are both distillates and trade in close correlation, meaning any diesel price spike will flow directly into home heating bills. He said supply itself is not the concern — the U.S. is a net exporter of distillates — but affordability is. “They might go broke for the price,” he said of households in New England that have no practical alternative to heating oil. An El Niño weather pattern, which historically delivers warmer-than-usual winters to the Northeast, could reduce heating demand and ease some pressure on distillate prices, but that outcome remains uncertain.
- Diesel futures collapsed 25.45 cents per gallon in a single session on Iran peace talk rumors, then rebounded 10–11 cents the next day, while the DOE weekly benchmark settled at $6.292 per gallon, down $0.06.
- Global refining capacity losses of roughly 10 million barrels per day and deeply backwardated diesel futures signal inventory tightness that analysts say will persist even if geopolitical conflict eases.
- Valero bought the shuttered LyondellBasell Houston refinery for ~$350 million while Marathon sold two operating Midwest refineries for over $4 billion, highlighting the premium on immediately productive refining capacity.
This Summary is generated thanks to a transcription of the interview, for the full interview please enjoy the video above.
