As of Monday, the price of a liter of diesel fuel at Estonian gas stations ranged between €1.91 and €1.93, while gasoline cost between €1.76 and €1.78 per liter. By Tuesday, the price of diesel had fallen below €1.90 and gasoline ranged between €1.71 and €1.73 per liter.

Although diesel prices in Estonia have previously exceeded those of gasoline — for example, at the end of 2021 and in 2022 when Russia launched its full-scale war against Ukraine — historically this has not been the usual situation.

The main reason for the sharp rise in diesel prices is simple: a significant volume of diesel fuel was exported through the Strait of Hormuz, which is now practically closed, said Alan Vaht, a member of the management board of Terminal.

"And this fuel was consumed in Europe. Now that exports from there have essentially been cut off, this is also the main reason why the global market price of diesel has increased by 65 percent, crude oil by 45 percent and gasoline by 43–44 percent," he said.

Another factor behind the price increase is a colder-than-usual winter, during which large amounts of heating oil were consumed in Europe, reducing diesel reserves. In addition, diesel inventories in the United States were already below the five-year average even before the outbreak of the war in Iran, Vaht said.

"One more important factor explaining why gasoline prices have risen less is that the summer driving season has not yet begun. Taken together, all these factors mean that gasoline prices have increased significantly less than diesel prices," Vaht added.

Diesel fuel has become more important in Europe

Europe's diesel reserves are in a poor state, said Indrek Sassi, fuel pricing manager at Circle K.

"The rise in diesel prices has also been amplified by relatively low reserves in Europe, including Northern Europe. When stocks are tight, even a small supply risk is enough to push market prices up quickly," he noted.

Diesel prices have overtaken gasoline primarily because diesel has become a more strategically important and in-demand product on the European market, Sassi said.

"Diesel is widely used in the transport sector, industry and also for heating. In 2023, diesel accounted for 64 percent of consumption in the European Union's transport sector, compared with 26 percent for gasoline," he said.

And because diesel reserves are smaller and it is more difficult to produce, supply disruptions and market pressures affect diesel prices particularly quickly.

Tarmo Kärsna, head of business development at Alexela, noted that diesel is the most widely used transport fuel in the world and its price tends to react more quickly than gasoline during crises. Risks caused by the Iran conflict in the Strait of Hormuz mean that availability risks and the risk premium for diesel have increased faster than for gasoline, he said.

"The global market price of gasoline has also risen, but at a slower pace. Gasoline supply chains are often more closely tied to production nearer to consumption areas and follow a different demand pattern," Kärsna added.

Prices likely won't come down for months

Future price movements will depend on the duration of the conflict with Iran, as well as how quickly and to what extent global refineries can increase production and how supply chains develop, Kärsna said.

Vaht noted that if an agreement is reached, the war could end within hours, after which the question will be how quickly the tangled web of production and logistics can be unraveled. It will not be resolved in a week or two, but will more likely take several months, he added.

"Resolving this entire maze of problems will take an enormous amount of time. Until then, there is no real prospect of diesel prices falling on the global market. This is a long-term problem we are facing today," Vaht said.

Sassi also noted that there are no signs that diesel prices will fall to the level of gasoline in the near future or, conversely, that gasoline prices will quickly catch up with diesel.

Kärsna added that if diesel supply increases and the risk premium declines, some narrowing of the price gap between diesel and gasoline can be expected. However, if traffic through the Strait of Hormuz — which handles 20 percent of global crude oil flows — remains disrupted, diesel prices will stay higher due to stronger demand, he said.

Summer diesel to deliver minor relief

Diesel prices will decline slightly with the arrival of summer-grade fuel, as is typically the case. According to Vaht, this will bring price relief of about 2.5 cents per liter. For comparison, the canceled excise duty increase provided relief of 3.8 cents per liter, he added.

Sassi said the usual price difference between Arctic-grade and summer diesel is four to six cents per liter.

"At the same time, it should be taken into account that the seasonal effect is limited and, on its own, is unlikely to eliminate the broader price gap between diesel and gasoline," he noted.

Kärsna said that since fuel prices depend on the varying margins added by refineries, the margin for summer diesel is generally lower than for winter diesel, which can provide some price relief. However, in the current situation, this may not have a significant effect.

"However, if global market prices are under strong upward pressure at the same time, for example due to geopolitical risks, this price difference can quickly be offset and retail prices may not fall noticeably for consumers," he said.

--

Follow ERR News on Facebook and X and never miss an update!