Diesel squeeze to run well into 2027 as Iran war disrupts supply, IEA warns

The International Energy Agency has warned that tight diesel supplies will last well into next year, with the rebuilding of lost inventories unlikely to begin before the second half of 2027. In its October Oil Market Report released on Wednesday, the agency said the market would stay tight even as refinery output recovers.

Global diesel exports fell by 700,000 barrels a day year on year last month, according to IEA data. A 1.3 million barrels per day loss from Russia and the Middle East was only partly offset by higher supply from other sources, the agency said.

Inventories drained ahead of winter

A counter-seasonal tightening in gasoil markets in the third quarter, combined with "much heavier-than-normal inventory declines" in the preceding three months, had "deprived global gasoil markets of crucial stock cover ahead of the peak winter demand season," the IEA said.

Diesel demand has remained strong, supported by government measures aimed at easing high prices for consumers. "Falling inventories, soaring cracks, and steepening levels of backwardation have signalled the need for additional supplies," the agency said. Even with a rapid recovery in refinery throughputs into year-end, gasoil supply falls short of meeting demand in the fourth quarter of 2026, it added.

Record prices from Singapore to the US

Wholesale diesel prices exceeded $200 a barrel in Singapore in mid-September and reached all-time highs of around $220 per barrel in Europe and the United States. Retail diesel prices rose in tandem to record levels in most major economies. US diesel prices hit $6 a gallon for the first time last month as the Iran war continued to weigh on global energy markets.

The IEA warned that tensions in the crude freight market meant delivered diesel prices in the dominant gasoil importing markets, Europe, Africa and Latin America, could rise again in the coming weeks.

Doubts over Trump-Putin diesel deal

Last week, US President Donald Trump said he had made a deal with Russian counterpart Vladimir Putin for Russia to supply 300,000 metric tons of diesel to the global market, in a bid to offset sharp price rises. Russian energy has been heavily sanctioned by Western governments since Moscow's full-scale invasion of Ukraine in 2022.

The IEA said the proposed Russian diesel supply deal would have little macroeconomic impact. Speaking at the IMF meetings in Bangkok on Wednesday, European Commissioner for the Economy and Productivity Valdis Dombrovskis said "now is not a time to ease sanctions on Russia." He said the volumes under discussion would not have any macroeconomic significance and questioned whether Russia could deliver them anyway. Italian Prime Minister Giorgia Meloni warned the deal contradicts efforts to get Putin to the negotiating table with Ukraine.

Demand and supply forecasts

The IEA forecast that overall oil demand would fall by an average of 2.6 million barrels per day in 2026, with diesel registering 25% of that drop. Oil supply was projected to decline by an average of 5.8 million barrels per day this year before rising by 7.7 million barrels per day in 2027.

The agency warned that "renewed attacks in the Gulf leave the recovery fragile." Riyadh has come under a series of attacks by Yemen's Houthis, some of them fatal. Saudi officials said on Wednesday that an administrative building belonging to oil giant Saudi Aramco was targeted overnight. Saudi production increases in September drove OPEC+ supply gains that month.

For Nigeria and other African importers, the warning on delivered prices is the key takeaway. The IEA lists Africa among the markets where crude freight tensions could push diesel costs higher again in the coming weeks, keeping pressure on transport and running costs for businesses.