The Strait of Hormuz remains open this week, with shipments nearing prewar levels, but fuel prices won’t follow suit until diesel shipments resume and countries replenish their oil inventories.
Last week, the U.S. Strategic Petroleum Reserve fell to a low it hadn’t seen since 1982 — when the emergency stockpile was in its infancy and the government was building it from scratch. The reserve holds 283.8 million barrels, but it typically holds between 500 million and 600 million barrels, with a maximum capacity of 714 million barrels, according to the Energy Department. The administration is drawing down the stockpile under the 172-million-barrel release President Donald Trump ordered in March after Iran restricted exports through the strait.
America is not alone. Saudi Aramco CEO Amin Nasser called the world’s supply cushion “scarily thin” on Monday, according to the Financial Times, and it is about to get thinner. On Friday, Group of Seven leaders agreed to release 100 million barrels of oil and diesel from emergency reserves over four months, with a large share of the diesel going out in the first 20 days. However, analysts say that won’t fix the underlying problem.
“A release of this magnitude could temporarily reduce diesel prices by 25 cents per gallon but does little to increase refinery capacity to produce more,” Andy Lipow, president of Lipow Oil Associates, told NBC News.
The ships carrying crude are mostly back, but the ones carrying diesel are not. The Wall Street Journal reported that crude is moving through the strait at about 76% of prewar levels, but refined products like diesel make up only 11% of cargoes, down from more than 20% before the war.
“The crude market has largely normalized even as refined product supplies remain constrained,” JPMorgan analysts said, according to CNBC. Missile strikes and other war-related outages have knocked Middle East diesel refineries offline. The Middle East spent 15 years building large-scale refineries for diesel and jet fuel exports, so when they go down, the world loses a major supplier.
Countries that can take on additional production are keeping their diesel at home. Major Asian refiners in China, Japan, and South Korea are holding on to what they make instead of exporting it, leaving the United States as a key supplier. The White House was preparing a 90-day diesel export ban but scrapped the measure after G-7 countries agreed to release diesel, Politico reported.
“Europe has a lot of diesel, and they’re going to be making a major world contribution, and so are we,” Trump said last week. “And we’re not going to be doing the export ban.”
In the last week, the average prices of a gallon of gas and diesel have fallen more than 10 cents but are not near prewar prices. Trump said on Thursday, “I will tell you the energy prices are gonna be rapidly, rapidly coming down.” The administration has repeatedly argued that prices will normalize once the war in Iran ends.
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