Washington Wants Europe's Diesel Reserves

On Tuesday the Department of Energy offered up to 40 million barrels from the Strategic Petroleum Reserve, the last of the 172 million the United States pledged to the IEA's emergency release in March. The same day Reuters reported, citing two sources, that the White House had urged the European Union to draw down its emergency diesel stocks.

Washington has now put its whole commitment on the table, and all of it is crude. What it wants from Europe is diesel.

The reserve holds the wrong product

The SPR held 284.6 million barrels in the week to 18 September, the latest EIA figure. That is down from 415 million on the eve of the war and the lowest level since the autumn of 1982. The new tranche, a loan that companies repay with a premium, will take it lower.

More crude helps less than it did in March. By August the Gulf's crude export losses had narrowed to just under 45%, on the IEA's numbers, while its refined product losses were still near 60% and its diesel exports were running at about a quarter of the pre-war level. A crude release gives refiners more feedstock. It adds no refining capacity, and refining is where the shortage now sits.

We set out the full argument today in The Fog of the Energy War →

What the pump is saying

The EIA's national on-highway diesel average was $6.382 a gallon in the week to 28 September, down from the record $6.529 a week earlier. It was $5.599 on 31 August and $3.809 in the last week before the war.

Gasoline has risen far less. Regular averaged $4.465. Over twelve months diesel is up 70% and gasoline 43%, and diesel's premium over gasoline has widened from 64 cents a gallon to $1.92.

One detail cuts against the obvious reading. US distillate stocks rose by about 4 million barrels between 21 August and 18 September, to 107.4 million, over a month in which the pump price climbed 88 cents. Our reading is that American diesel is being priced by what foreign buyers will pay for Gulf Coast cargoes, which is why exports have become the political target.

Why Washington is looking abroad

The United States exported a record 1.6 million barrels a day of diesel in August, up from about 1 million in February and roughly a fifth of all diesel traded by sea. With the midterms five weeks away, farm-state Republicans want an embargo, and President Trump said on 27 September that a ban was under serious consideration. The White House says no decision has been made. Energy Secretary Chris Wright opposes an outright ban.

Foreign stocks are the alternative. Wright said on the record on Tuesday that "several European member countries have released only a fraction of the crude oil and petroleum products they pledged" in March, when 32 IEA members agreed to release 400 million barrels and EU countries took on 20% of the total. Reuters reports that the frustration is aimed at France and Germany.

Brussels has not agreed. The EU's energy commissioner, Dan Jørgensen, says the bloc has discussed a further release with the IEA and has yet to decide whether to ask member states for one. Europe has reasons to hesitate. Aramco's October crude allocations to its European term buyers are zero, and the stocks exist for the winter ahead.

What it means south of the Gulf Coast

Europe and Latin America buy from the same refineries. Kpler's list of the largest buyers of American diesel runs Brazil, Chile, Mexico, Peru, Morocco, France and the United Kingdom.

So Europe's answer matters here. If European governments draw on their stocks, they need fewer Gulf Coast cargoes this autumn and the case for an export ban weakens. If they decline, export limits are the lever Washington has left, and Latin America is the most exposed customer. American diesel covers about a third of the region's consumption, according to S&P Global. Its share of Brazil's demand rose from 5.5% across January to July to 13.2% in August, and Mexico entered the autumn with low inventories, according to the Atlantic Council.

The link between the two is our inference. Reuters describes the options under review in Washington as foreign stock releases, export restrictions and work with refiners.

Also this week

• Russia. Moscow confirmed today that its ban on diesel exports by producers runs to 31 October. A separate ban on traders and resellers runs to 31 January 2027.
• EIA inventories, today at 10:30 a.m. Eastern. Tuesday's industry estimate had crude up 1.0 million barrels, gasoline up 3.0 million and distillate down 0.3 million. The official figures follow this morning.
• LNG Canada. Shell and its partners approved Phase 2 on 29 September, doubling capacity to 28 million tonnes a year from the early 2030s. It does nothing for this winter, but the gas reaches Asia from the Pacific without passing Hormuz.

The question for October is who gets the diesel that exists, and whether it comes out of American exports or European reserves. The crude price will not answer it.

Read the full analysis: The Fog of the Energy War →

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