US diesel futures surge to over 2-year high on Middle East supply disruptions

By Shariq Khan

NEW YORK, March 2 (Reuters) - U.S. diesel futures surged past $3 per gallon on Monday for the first time since November 2023, as Iran responded to U.S. and Israeli attacks on the country by striking regional production centers and disrupting shipping in the Strait of Hormuz.

Diesel prices are the most susceptible to the worsening conflict in the Middle East because the region is a major supplier of the fuel, and because diesel inventories have dropped sharply after high demand for heating and power generation during a harsh winter, analysts and traders said.

"The critical issue relates to distillate fuel oil. These stocks are at the bottom of the normal range," energy economist Philip Verleger wrote to clients.

U.S. diesel futures HOc1 settled nearly 12% higher on Monday, outperforming both U.S. crude CLc1 and gasoline futures RBc1, which settled over 6% and nearly 4% higher, respectively.

U.S. distillate fuel oil stocks, which include diesel and heating oil, were at about 120.4 million barrels as of February 20, more than 5% below the average of the last five years at this time, government data showed.

PRICES TEST TRUMP'S SUPPORT

Rising domestic fuel prices are set to be a major test of U.S. President Donald Trump's decision to attack Iran just months ahead of midterm elections in November, in which soaring costs are likely to be among voters' primary concerns. Gasoline prices at the pumps crossed $3 a gallon for the first time since November on Monday.

Surging diesel costs in particular could derail U.S. manufacturing activity, and hit farmers' budgets just as the planting season gets underway.

"Farmers will have to bear the brunt of any increases to diesel costs," said Alex Hodes, energy director at Kansas-based fuel supplier Oasis Energy. "Fuel is the smallest of farmers' major expenses, but it is also heavily scrutinized," he said.

U.S. diesel prices are also more exposed to extreme price changes now than in the past because of the boom in data centers in the country, which are more willing to pay higher prices for the fuel for electricity generation than others, Verleger said.

Prices at the New York Harbor spot market could jump from around $2.70 per gallon to $4 a gallon over the next four weeks, as data centers in the mid-Atlantic start hoarding fuel, Verleger said.

Going forward, refiners will likely switch their production slates to heavily favor diesel over other products, potentially helping limit some of the price surges, Ritterbusch and Associates said in a note.

More diesel is also expected to be released from secondary storages while industrial and freight demand will slow due to sharp price increases, Ritterbusch said.