Asia's diesel market is experiencing one of its biggest supply squeezes in recent years, sending refining margins to unusually high levels and raising concerns over fuel prices.
Diesel cracks — the difference between the price of diesel and the cost of the crude oil used to produce it — have climbed from about $39 a barrel in late June to nearly $80. The higher the crack spread, the more profitable it is for refiners to make diesel. A sharp rise usually signals that diesel supply is struggling to keep up with demand.
While tensions in the Middle East have accelerated the rally, analysts say the surge is also being driven by deeper structural problems, including falling Russian diesel exports, lower refinery runs across Asia and disruptions to global shipping routes.
Here's why diesel prices have risen so sharply — and what needs to happen before the market cools.
Why are diesel prices rising?
Several factors have hit the market at the same time, reducing diesel supply just as demand for refined fuels remains firm.
According to Pankaj Srivastava, Senior Vice President of Commodity Markets (Oil) at Rystad Energy, geopolitical tensions have added a significant risk premium to energy markets.
"So, if you are talking about geopolitical risk, as far as crude prices are concerned, we think that close to a $20-per-barrel addition is there because of the geopolitical risk," he told CNBC-TV18.
The region is not only one of the world's largest crude oil suppliers but also a major exporter of diesel, jet fuel and other refined products. Any threat to these supplies quickly tightens global fuel markets.
How have Russian refinery outages made the problem worse?
A much bigger driver of the rally is the sharp fall in Russian diesel exports.
Russia has traditionally been one of the world's largest diesel suppliers. But repeated drone attacks have damaged key refinery processing units, reducing the country's ability to convert crude oil into diesel and petrol.
Srivastava said Russian diesel exports have dropped from around 1.2 million barrels per day on a weekly basis to roughly 400,000 barrels per day.
Before the conflict, Russian refineries processed around 5.4 million barrels of crude every day. That has fallen to about 4.2-4.3 million barrels per day.
Unlike earlier attacks that mainly affected storage tanks or pipelines, recent strikes have hit the conversion units inside refineries that actually produce transport fuels.
"Repairs to those units are going to take a significant amount of time," Srivastava said.
With fewer Russian cargoes available, buyers have been forced to compete for supplies from other exporters, pushing diesel prices and refining margins even higher.
Why can't other refineries fill the gap?
Normally, higher diesel prices encourage refiners to increase production, helping the market rebalance over time.
This time, however, the industry's ability to respond is limited.
Asia's refinery throughput has fallen to around 28 million barrels per day from roughly 33-34 million barrels earlier, reducing regional fuel production when supplies are already tight.
At the same time, refiners in Europe and the United States are already operating close to maximum capacity, leaving little room to offset weaker output elsewhere.
The result is a global refining system with very little spare capacity.
How are Red Sea disruptions affecting diesel?
Shipping disruptions have created another bottleneck.
According to Xavier Tang, Senior Crude Analyst at Vortexa, the conflict has spread towards the Red Sea, forcing some crude tankers to take longer routes.
"As a result, Asian refiners will start seeing delays in cargo arrivals," Tang said.
Those delays make it harder for refineries to secure feedstock on time, increasing the risk of lower refinery runs and keeping diesel supplies tight.
Why does Europe's demand matter?
The flow of diesel around the world has also changed.
Tang said stronger demand in Europe and the wider Atlantic Basin is attracting cargoes that would otherwise have remained in Asia.
"What we are seeing is supply being drained from Asia and moving towards the Atlantic Basin."
That leaves Asian buyers competing for fewer diesel cargoes, pushing regional prices higher.
At the same time, refiners are finding it harder to secure medium sour crude grades from Russia, Kazakhstan and the Middle East, creating tightness in both crude supply and refined fuels.
Who benefits from higher diesel cracks?
The rally is not bad news for everyone.
Complex refineries that can process a wide range of crude grades and maximise diesel output are earning exceptionally strong refining margins.
Simpler refineries, however, may not be able to take full advantage because they lack the flexibility to optimise diesel production.
What does this mean for India?
India remains one of the world's biggest buyers of Russian crude, and analysts do not expect that to change unless alternative supplies become readily available.
"India is going to buy Russian crude unless viable alternatives are available," Srivastava said.
Even if Russian imports decline, India has previously replaced those barrels with supplies from the UAE, the United States, Brazil, Guyana and African producers.
However, Indian refiners are no longer enjoying the steep discounts on Russian crude that helped cushion them from higher global oil prices over the past two years. Those discounts have narrowed sharply because of the latest disruptions in the Red Sea.
India's refineries are currently operating at more than 110% utilisation, reflecting strong domestic and export demand. While robust refining capacity allows India to benefit from high diesel margins, narrower crude discounts could increase input costs if supply disruptions persist.
When could diesel prices come down?
Analysts believe the current squeeze is unlikely to ease quickly.
Srivastava expects elevated diesel cracks to persist at least until the end of the current quarter unless geopolitical tensions ease and shipping disruptions in the Red Sea begin to normalise.
If the crisis is resolved by the end of August and refinery operations gradually recover, the market could start to rebalance.
"Our expectation is that if the crisis gets resolved by the end of August, then by the end of the year refinery runs will return to normal levels, and that will automatically reduce diesel prices."
In that scenario, diesel cracks could fall back towards about $40 a barrel.
Until then, Asia's diesel market is likely to remain under pressure as refinery outages, disrupted shipping routes and geopolitical uncertainty continue to restrict supplies at a time when global spare refining capacity is limited.
Diesel cracks — the difference between the price of diesel and the cost of the crude oil used to produce it — have climbed from about $39 a barrel in late June to nearly $80. The higher the crack spread, the more profitable it is for refiners to make diesel. A sharp rise usually signals that diesel supply is struggling to keep up with demand.
While tensions in the Middle East have accelerated the rally, analysts say the surge is also being driven by deeper structural problems, including falling Russian diesel exports, lower refinery runs across Asia and disruptions to global shipping routes.
Here's why diesel prices have risen so sharply — and what needs to happen before the market cools.
Why are diesel prices rising?
Several factors have hit the market at the same time, reducing diesel supply just as demand for refined fuels remains firm.
According to Pankaj Srivastava, Senior Vice President of Commodity Markets (Oil) at Rystad Energy, geopolitical tensions have added a significant risk premium to energy markets.
"So, if you are talking about geopolitical risk, as far as crude prices are concerned, we think that close to a $20-per-barrel addition is there because of the geopolitical risk," he told CNBC-TV18.
Srivastava estimates that around 30-40% of the current diesel crack margins are directly linked to geopolitical risks surrounding the Middle East.
The region is not only one of the world's largest crude oil suppliers but also a major exporter of diesel, jet fuel and other refined products. Any threat to these supplies quickly tightens global fuel markets.
How have Russian refinery outages made the problem worse?
A much bigger driver of the rally is the sharp fall in Russian diesel exports.
Russia has traditionally been one of the world's largest diesel suppliers. But repeated drone attacks have damaged key refinery processing units, reducing the country's ability to convert crude oil into diesel and petrol.
Srivastava said Russian diesel exports have dropped from around 1.2 million barrels per day on a weekly basis to roughly 400,000 barrels per day.
Before the conflict, Russian refineries processed around 5.4 million barrels of crude every day. That has fallen to about 4.2-4.3 million barrels per day.
Unlike earlier attacks that mainly affected storage tanks or pipelines, recent strikes have hit the conversion units inside refineries that actually produce transport fuels.
"Repairs to those units are going to take a significant amount of time," Srivastava said.
With fewer Russian cargoes available, buyers have been forced to compete for supplies from other exporters, pushing diesel prices and refining margins even higher.
Why can't other refineries fill the gap?
Normally, higher diesel prices encourage refiners to increase production, helping the market rebalance over time.
This time, however, the industry's ability to respond is limited.
Asia's refinery throughput has fallen to around 28 million barrels per day from roughly 33-34 million barrels earlier, reducing regional fuel production when supplies are already tight.
At the same time, refiners in Europe and the United States are already operating close to maximum capacity, leaving little room to offset weaker output elsewhere.
The result is a global refining system with very little spare capacity.
How are Red Sea disruptions affecting diesel?
Shipping disruptions have created another bottleneck.
According to Xavier Tang, Senior Crude Analyst at Vortexa, the conflict has spread towards the Red Sea, forcing some crude tankers to take longer routes.
"As a result, Asian refiners will start seeing delays in cargo arrivals," Tang said.
He said rerouting vessels could delay crude deliveries into Northeast Asia by around a month.
Those delays make it harder for refineries to secure feedstock on time, increasing the risk of lower refinery runs and keeping diesel supplies tight.
Why does Europe's demand matter?
The flow of diesel around the world has also changed.
Tang said stronger demand in Europe and the wider Atlantic Basin is attracting cargoes that would otherwise have remained in Asia.
"What we are seeing is supply being drained from Asia and moving towards the Atlantic Basin."
That leaves Asian buyers competing for fewer diesel cargoes, pushing regional prices higher.
At the same time, refiners are finding it harder to secure medium sour crude grades from Russia, Kazakhstan and the Middle East, creating tightness in both crude supply and refined fuels.
Who benefits from higher diesel cracks?
The rally is not bad news for everyone.
Complex refineries that can process a wide range of crude grades and maximise diesel output are earning exceptionally strong refining margins.
Simpler refineries, however, may not be able to take full advantage because they lack the flexibility to optimise diesel production.
What does this mean for India?
India remains one of the world's biggest buyers of Russian crude, and analysts do not expect that to change unless alternative supplies become readily available.
"India is going to buy Russian crude unless viable alternatives are available," Srivastava said.
Even if Russian imports decline, India has previously replaced those barrels with supplies from the UAE, the United States, Brazil, Guyana and African producers.
However, Indian refiners are no longer enjoying the steep discounts on Russian crude that helped cushion them from higher global oil prices over the past two years. Those discounts have narrowed sharply because of the latest disruptions in the Red Sea.
India's refineries are currently operating at more than 110% utilisation, reflecting strong domestic and export demand. While robust refining capacity allows India to benefit from high diesel margins, narrower crude discounts could increase input costs if supply disruptions persist.
When could diesel prices come down?
Analysts believe the current squeeze is unlikely to ease quickly.
Srivastava expects elevated diesel cracks to persist at least until the end of the current quarter unless geopolitical tensions ease and shipping disruptions in the Red Sea begin to normalise.
If the crisis is resolved by the end of August and refinery operations gradually recover, the market could start to rebalance.
"Our expectation is that if the crisis gets resolved by the end of August, then by the end of the year refinery runs will return to normal levels, and that will automatically reduce diesel prices."
In that scenario, diesel cracks could fall back towards about $40 a barrel.
Until then, Asia's diesel market is likely to remain under pressure as refinery outages, disrupted shipping routes and geopolitical uncertainty continue to restrict supplies at a time when global spare refining capacity is limited.
Edited by : Swapnil Deshpande
First Published: Jul 30, 2026 11:35 PM IST
