Israeli war latest wild card in surge behind ‘perfect storm’ of rising diesel prices

The latest wild card in the pricing of diesel-up, gasoline-down fuel supply is the Hamas surprise attack from Gaza that has left hundreds dead in Israel.

While Israel is not a major oil producer, Iran is. The Wall Street Journal reported Iran was involved in directly planning the attacks, which raises the prospect that the U.S. could add to enforcement of sanctions on its exports.

According to Goldman Sachs, prior to the Israeli attacks, Iran had raised its oil production by around 500,000 barrels a day. Goldman Sachs estimated for every 100,000 barrel a day decline in Iran’s production next year, Brent crude oil prices would rise by about $1 per barrel.

At press time, Brent oil (the global benchmark) was selling for around $88 a barrel. West Texas Intermediate oil (the U.S. benchmark) was selling for around $86 a barrel. That was up about 3% on the first trading day following the weekend of war activity in Israel.

Oil has been trading erratically lately, bouncing between $70 and $90 for most of the past 52 weeks. Explanations for the volatility vary. Things like refinery maintenance, summer driving season and the weather are often cited—for both when crude oil prices rise and also for when they fall.

Truth is, global oil pricing and trading is clearly a big-boy occupation. But things like regional wars in the Middle East can definitely shake things up, and produce a new wave of pricing speculation.

Now, financial markets are abuzz about what this latest escalation of war-like tensions in the Middle East could mean for worldwide oil prices, both near and longer term. Crazy talk of $150 a barrel oil is being mulled in some quarters if panic overtakes the gasoline-diesel markets.

“Oil in the $100s is not out of the realms of possibilities,” Manish Raj, managing director at Velandera Energy Partners, told MarketWatch, the business-oriented web site. So far, however, the “crisis seems to have been contained within Israeli borders,” he added.

Already, diesel prices were rising in recent weeks because traders were afraid refineries could not sell enough fuel to meet global demand. The apparent supply shortfall is also being driven by the Ukraine war between Russia and the West.

The Russia-Ukraine war has taken some oil supply away from Western countries. But the Russians have more than made up for that by evading Western sanctions and selling its oil to India, China and other nations.

All this is leading many leading oil analysts to warn of a “perfect storm” approaching on the diesel market. Diesel prices could rise if the Northeast U.S. endures a colder-than-forecast winter. Refineries use some of the crude oil reserved for diesel to shift production to home heating oil if harsh winter temperatures endure in the U.S.

At press time in the U.S., diesel and gasoline prices are headed in opposite directions. Diesel is on the rise, selling for around $4.60 nationwide average, which is down 24 cents from a year ago, according to the Department of Energy on-highway average released every week. Diesel has risen about 10 cents in the last month.

Meanwhile, gasoline is selling for a nationwide average of around $3.79. That is basically flat from the year-ago average.

Analysts and users of diesel say they worry that prices could spike this winter if even a few refineries in Europe and North America shut down for repairs or maintenance. That’s because major oil exporters, such as China, Russia and Saudi Arabia, are selling less diesel and crude oil.

Shippers really have no good options other than passing fuel surcharges from the major trucking companies onto their customers.

Those surcharges are getting heavy again. Old Dominion Freight Line (ODFL), the market leader in the less-than-truckload (LTL) sector, for example, is posting a 36.32% fuel surcharge on its LTL shipments, down slightly from 38.8% a year ago but still near its 52-week high. And container or full truckload surcharges are even higher. ODFL was posting a 68% container surcharge last week, down slightly from 72.7% a year ago.

This is all leading to stubborn inflation across many businesses in the U.S. Shippers facing higher fuel costs are more likely to raise prices on groceries, consumer goods, and other things. That, in turn, could force the Federal Reserve and other central banks to raise interest rates or keep them high for longer.

The Federal Reserve has been aggressively combating post-pandemic inflation with fast-and-furious hikes to the federal funds rate. The Central Bank has now raised its benchmark rate 11 times in the last 12 meetings. Its most recent increase was implemented after its July 26 meeting, taking its cumulative increase to 5.25% this year.