Driving Discussions: Inside the Diesel Shake-Up

Sara: Hello, everyone, and welcome to our podcast mini series that shines a light on the refined products market. This series is part of an exciting new addition to Argus Consulting service offering, the Argus Refined Products Outlook. With this expansion, we can now provide focused, dedicated insights across both crude oil and refined products, making it easier for you to quickly find the information that matters most.

In this episode, we'll be exploring the diesel market, what's shifting, what's driving it, and why it really matters. And yep, this is episode one. So, thanks for being here right from the start. My name is Sara Raffoul, the manager of our new Argus Consulting subscription report, and your host for today's episode. Joining me from our London office are two of my colleagues, Daniel Wu, our senior diesel analyst and Josh Michalowski, our diesel reporter. Hello to both of you. It's great to have you, and I'm very excited to kick off this discussion with you.

Josh: Hi there.

Daniel: Hi. Pleasure to join today's episode.

Sara: I think we can all agree that the global diesel market has really been on a rollercoaster this past year. Taking a step back, 2025 brought an unusual number of shocks that hit the market at different points. We started with the first round of tariffs or the so-called Liberation Day back in April. And just as the market was digesting that, tensions in the Middle East flare. The Israel-Gaza conflict briefly spilled over into Iran, pulling the U.S. directly into the picture, and leading to what became a short, but intense 12-day conflict between Iran and Israel.

Coming into 2025, sentiment was overwhelmingly bearish. A lot of people leaned in hard, building sizable short positions. But as we moved into the second half of 2025, that narrative slipped sharply and the market turned bullish, positions swung to net long, and diesel cracks came under sustained upward pressure. And actually by November, we saw cracks increase to their highest levels in more than two years. So, I would like to kick off this discussion with you, Josh. Walk us through what changed, what drove the dramatic swing in sentiment, and why did diesel end up tightening so aggressively.

Josh: Yeah. So, I think the first thing that we need to mention, and this is something we're gonna touch on repeatedly throughout this podcast, is that the European diesel market has experienced a real disconnect between fundamentals and pricing this year, where pricing, as said, has been really driven by kinda broader geopolitical issues. I think another thing that must be mentioned, even though it's not a particularly new aspect of the market, is the lack of Russian exports towards Europe. Essentially what that does is it increases the journey time for Europe to get its imports, particularly from imports coming from east of Suez, and that leaves the market more vulnerable to supply shocks that traders can't easily anticipate. And it's mostly supply shocks and supply side factors that we saw drive price spikes in the European market this year.

Focusing on the largest jump in November, which you mentioned where cracks reached over $40 a barrel, the EU's imports prior to that kind of jump were really particularly poor. You know, arbitrages from both the U.S. and the Mideast Gulf were closed in October, meaning, imports were pretty poor for the month of November. Those poor imports came alongside a pretty heavy refinery turnaround period, with over 800,000 barrels a day of CDU capacity offline in Europe at one point. And then on top of that, you have the global diesel pool being limited by conflict-related damage to Russian energy infrastructure. Now, that doesn't directly influence the European market, but it knocks on.

On top of all of those fundamental factors as well, you have these geopolitical issues that I mentioned. Now, in November, the main focus was on U.S. sanctions on Russian oil firm, Lukoil. That stopped production at some Eastern European refineries and also just caused kind of wide disruption in the market. People were very confused. Firms lost a trading partner particularly close to the expiry of the gas oil futures, which caused a bit of a jump in them. And then, you know, even broader is just geopolitical factors such as the tariffs that you mentioned, the whole uncertainty around U.S. policy, and what President Trump is gonna tweet, you know. No one knows what's gonna happen. And then you have the Iran-Israel conflict in mid-June that also caused a smaller price spike. So, I think, yeah, overall, supply side factors driving the spikes alongside broad geopolitical issues.

Sara: Thank you, Josh. So, it's clear that the strength in the market was more supply-driven. As you mentioned, these were underpinned by supply shocks and geopolitics, even news headlines. But there's something else we need to talk about, right? Which probably we can shift gears and look at the demand side, particularly in places like Europe and China where there are signs that diesel consumption may be structurally changing. And Daniel, turning to you, how real is this decline in your view and what indicators matter most when you're trying to separate short-term noise from longer-term demand destruction?

Daniel: Yeah. I definitely think the structural demand decline in Europe and China is growingly clear, especially when we look at the road transport sector. The road sector typically accounts for 60% to 70% of total diesel consumption in major markets. So, major developments, as we have observed in the European and Chinese markets, have definitely been translated into demand impact. And if we look at the European market closely, firstly, we had diesel gate, which reshaped customers' preferences and eventually led to diesel to gasoline switch. And after that, we started to see the rise of EVs in the European market, although we had some headwinds in 2024 when EV sales slowed down. But we have seen the EV momentum in 2025 is coming back. And in fact, in December of 2025, we had seen the sales penetration of pure battery electric vehicles overtaking gasoline ones for the first time at 22.6%. And in 2025, pure battery electric vehicle sales penetration rose to 17%.

And on top of the rise in EVs and structural shift in the road transportation sector, the European market continues to see weak industrial activities as shown by the PMI readings. For most part of 2025, the manufacturing activities in the Eurozone remained in the territory of contraction. And similar to the European, we are seeing similar things happening in the Chinese market. Last year alone, we had seen Chinese total electric vehicles sales penetration rising above 50% for the first time. But not just the cars, but the trucks are also facing the challenge of alternative fuels, especially LNGs and electric trucks. Last year, we have seen over 50% of the truck sales in China to be LNGs and EVs.

In the Chinese market, people are still favoring electric vehicles despite reduced subsidies. And that's because of economic reasons. On paper, the operating cost of pure electric car is only 10% when compared to gasoline car. And on top of very aggressive EV growth in the Chinese market, we are seeing a weaker real estate sector and also slowed infrastructure constructions in the country because of mounting regional debt. With all this considered, we have already started to see the structural decline in diesel consumption in the two major markets, Europe and China.

Sara: Daniel, you actually brought something that's very important, which you touched on when you spoke about subsidies. So, the impact of regulation and policy do reshape markets. And what's interesting is that you mentioned this decline in demand in both regions. And you can see that the reasons are diverging. So, if we zoom in a bit, that decline isn't just an abstract trend. So, another big shift has been the growing role of biofuels and renewable diesels, particularly in markets like the U.S. So, Daniel, given the experience you've had, could you please elaborate further on this?

Daniel: Yeah. Actually, U.S. is a good example when it comes to how policies and regulations affect the diesel market in short term. And unlike the European and the Chinese counterparts, we have actually not started to see a structural decline in U.S. diesel consumption. But on the contrary, if we look at the demand figures from EIA for the first half of 2025, we actually saw a very strong demand, rising actually by 150,000 barrels per day on the year. And that was not because U.S. economies were doing particularly great, especially given the tariffs announcements unfolding during that period. But that was simply because of uncertainties around bio and renewable diesel production related policies.

And in particular, for example, the 45Z Clean Fuel Production Tax Credit was left with only guidance rules for 2025 from the President Biden's administration when he was departing from the office. And that left some key questions about eligibility unanswered, and prompted some bio and renewable diesel producers in the country to scale down their operations, which resulted in around 100,000 barrels per day of production decline during that period. And as a result, buyers in the country had to switch back to conventional diesel and eventually boosted conventional diesel consumption demand during this period. But as the current President Trump's administration is expected to release the proposed regulations for the 45Z credit imminently after it already exited White House review, we expect a swift return of bio and renewable diesel production.

But as Josh already said, there's still a lot of uncertainties when it comes to policy and especially considering the President Trump's administration's current stance on bio and renewable fuels. There's still a lot of stuff we can't be certain moving forward. But in contrast, Europe is taking a more steady and holistic view when it comes to the role of alternative low carbon fuels.

Sara: Thank you, Daniel. And maybe this is a good segue to discuss the European market. Josh, what can you tell us specifically about Europe? What are you seeing at the moment in terms of policies or even market trends that could further displace fossil fuel demand?

Josh: I think the biggest thing that has come into effect this year is the implementation of the EU's Renewable Energy Directive, that's more commonly known as RED III. Now, this is a very complex piece of legislation and it would take a long time to go into the full detail here. But the two key changes that you need to know about are the ending of double counting of certain waste feedstocks toward renewable energy targets, and the increase of the greenhouse gas reduction targets. Now, the overall effect of that essentially is that it will increase the blend of bio fuels in the finished diesel products and therefore, decrease the blend of fossil fuels in the finished diesel product. So, it's going to hit diesel demand in Europe.

Where it's come into effect already in Europe, it's come into effect in Germany. It's working towards being passed in legislation in the Netherlands, but when it is passed in the Netherlands, it will be passed retroactively from the 1st of January. So, it's essentially already in effect there and it looks like it will also come into effect in Belgium this year. The other EU countries are walking towards implementing RED III a bit slower.

To give you a scale of the kind of hit to diesel that RED III is gonna cause, Argus Consulting team has estimated that about 40,000 barrels a day of German road diesel demand will be substituted for biodiesel this year, mostly HVO. Now, that substitution demand is actually four times bigger than the consulting team's estimate of the structural decline in demand. So, we're talking some pretty big lost volumes of demand in an already declining demand picture for Europe. I do think it's worth mentioning that market participants have described the impact of RED III as slightly muted so far this year. But you've got to caveat that with the fact that January and February are seasonally the poorest periods for European road diesel demand. So, you know, it might just not have kicked into full effect yet and we might not be seeing that full effect just yet.

Sara: Thank you, Josh. Thank you both, actually. These have been quite insightful. So, it does seem to me like declining diesel demand sets the stage, but the real market movers right now are more geopolitical. So, the new EU sanctions have come into effect on 21 January, and I'm sure the both of you will agree that this initially lifted market sentiment. I'm gonna direct these two questions, one for Josh and one for Daniel. Maybe let's kick start with Josh. What's been the most disruptive aspect of those sanctions? And Daniel, do you think sanctions remain a persistent bullish risk for the diesel market or has the market largely adapted?

Josh: So, for the European diesel market, the sanctions have really hit imports from two main countries, being Turkey and India. There are three relevant refineries to look at in Turkey. That's SOCAR Star Refinery, and Tupras Izmit, and Izmit Refineries. They accounted for about 10% of the EU's diesel imports last year. In India, you've got Reliance's 1.4 million barrel a day, Jamnagar Refinery, the largest refinery in the world, and that accounted for about 15% of the EU's diesel imports last year. Now, obviously, if those volumes were lost in entirety, that would cut off a pretty big portion of the EU's supply and theoretically would support prices. But it's not quite that clear at the moment.

It looks like Star and Izmit have continued to take Russian crude so they won't be able to export. But Izmir has stopped taking Russian crude in November. So, exports from Izmir towards the EU are theoretically possible. Looking towards India, it's a much more hazy picture with Jamnagar at the moment. Now, it's really key to mention that if Jamnagar stopped importing Russian crude, it would obviously be able to export its diesel towards the EU. But it said that it had split its production lines so it stopped importing Russian crude into the export-orientated section of Jamnagar on 20th November. And since then it's said that it stopped importing Russian crude to the entirety of Jamnagar on 20th December. So, 60 days from 20th December, vessels should be able to load for the EU from Reliance's Jamnagar.

I think other things to do with Reliance are there are two tankers holding middle distillates in the Mediterranean at the moment and it's really unclear whether they're gonna load or not into the EU. Check out the European Products Report for more information on that. And in the short-term because of that uncertainty, it looks like Reliance distillates have kind of swung towards West Africa instead which, you know, suggests that maybe they're using the Red Seal less, going around the Cape more to have that kind of optionality there.

Sara: Daniel, what are your thoughts?

Daniel: I think the impact of the sanctions will be limited especially if we look at the futures market. There seems to be some sort of market consensus because this time, the strength is to a lower extent and lasted for a shorter period when compared to what we had seen in early 2023 when the first batch of EU sanctions come into force banning the imports of Russian products. And in general, when we look at the European market, the people seems to be more comfortable with maintaining low inventories as time goes by. I guess that's mainly to do with people coming to the effect of the structural diesel decline in the market.

And on top of this, in 2026 moving forward, we definitely see relatively ample alternative supplies available for the European market even if in the worst scenario when all the supplies from Turkey and India are lost, which is unlikely looking at the development recently. When we look at across the Atlantic basin in the U.S., we have seen U.S. Gulf Coast refiners have been able to ramp up their operations and raise their diesel inventories, which should put them in a more better position to supply the European markets when arbitrage economics allow.

And in Mexico, we have also seen improvement in their refinery operations. The runs have been constantly over 1 million barrels per day last year, actually, considering the long period of underinvestment in the refining sector is actually a very extraordinary achievement. And the Tula refinery, in particular, with better maintenance and a lighter crude slate has been able to raise the diesel yields. So, supply from the country, especially with two hydrocrackers expected this year and the next year, are looking better as well, which should also reduce their dependence on U.S. diesel imports, and freeing more U.S. supplies for the European markets when needed.

And when looking elsewhere in Middle East and in Asia Pacific in general, more capacities. For example, the recent expansion at Bahrain's Sitra refinery has enabled the country to export more diesel to the European market. And in general, in 2026, we expect 800,000 barrels per day of CGU capacity addition and a similar quantity of upgrading capacity additions, mainly in Middle East and also generally, in Asia Pacific. And a large part of this secondary capacities would be in the form of hydrocracking and coking. And this will help ensure a better supply outlook moving forward. And with this combined from both the demand side and supply side, we do see a lengthening diesel balance. And as a result, I don't think the sanctions will be a main issue.

Josh: I do also think it's mentioning the UK's place in this kind of sanctions picture and that's because the UK have said they would implement matching sanctions to the EU. But they haven't detailed any of those sanctions. And they also haven't set a date for when those sanctions would come into effect. Now, that basically leaves, you know, an opportunity open for Reliance barrels or Turkish barrels to head towards the UK, and kind of fill up all their imports there. That could even lead to the UK exporting some of its own domestic product. Whether that actually is going to happen, I probably doubt that because of the political look of it. But it's still a possibility. And the uncertainty is still there.

Sara: Thank you, Josh. And I do really wanna stick to the theme on geopolitics, although, Daniel, you did mention something very important which is new supplies coming on stream, the reliability of refining operations. So, let's go back to Russia which was an important factor last year. Does it remain a key uncertainty this year? Josh, what do you think about that? And we can't continue this discussion without mentioning the ongoing tension in the Middle East, particularly with Iran.

Josh: Yeah. So, on Russia, I mean, you've got to keep an eye on it, for sure. Conflict related damage to Russian energy infrastructure from August last year, really, supported prices. And I mean, I kind of created a higher floor for those prices. And I'm assuming that conflict raised, the damage will continue to build up. You can expect, especially when larger refineries are affected, you know, there might be some price spikes from that. I do think it's worth mentioning that the sanctions could mute the impact of Russian energy infrastructure damage somewhat and that's because of Turkey.

Essentially, Turkey used to import Russian diesel for its own domestic market and then export its own output. But if Turkey's exports to the EU drop off, which is still unclear whether it will, it looks to be slightly smaller at the moment. But whether that trend will continue this year is not totally clear. But if Turkey's exports to the EU do drop off, then theoretically, you could see that kind of knock-on effect from lower Russian exports become diminished.

Looking towards, you know, the heightening tension between the U.S. and Iran, that is the big topic of conversation at the moment in the European diesel market. And that's because, you know, there's building worry about disruption to flows through the Strait of Hormuz. A lot of flows of diesel come from the Mideast Gulf through the Strait of Hormuz, and if they get cut off, you know, there's gonna be less supply heading towards Europe. It's worth mentioning that Iran made a more direct threat to cut off the Hormuz last year. It didn't actually do that in the end. Whether it will continue to do so this year, who knows? Who can predict what President Trump will do? I think that's been a pretty clear theme of the last year.

Sara: Yeah. That's for sure, Josh. So, let's just put all this together, right? Structural demand erosions, biofuels, sanctions, geopolitics, new refining capacity coming online, etc. Is today's diesel market fundamentally tighter and more fragile than it was a few years ago? And if so, what does that mean for volatility going forward? Daniel, what are your thoughts on this?

Daniel: Although diesel has been quite volatile over the past two to three years because of the Russia-Ukraine conflict, I can't really say that the diesel market has been fundamentally tighter. On the contrary, I think with what I have already elaborated on the structural demand decline in Europe and China, as well as improved supply outlook moving forward because of refinery capacity additions, I actually think the diesel market fundamentals will be lengthening and we will see more lengthening diesel balance moving forward, which will start to pressure on diesel price and the cracks. And moving forward, I wouldn't be surprised to see that diesel market coming back to fundamentals. But as what we have discussed on the geopolitical risk side, this risk still pose uncertainties on the market, especially in a world that seems to be undergoing fundamental change in the form of tariffs and military conflicts. Diesel as a product with regional refining imbalances, it relies heavily on global shipping. And a growingly unstable world could potentially mean more volatility moving forward, though on the fundamentals perspective, we do see a weaker profile for diesel.

Sara: Thank you, Daniel. And thank you both, actually. I do think we did cover a lot of material today and your insights have been really quite unique. So, yeah, it's been great talking to you both. And for our listener, that's it for today's episode. Thanks for listening. And if you're enjoying this series so far, do stick around there is a lot more to come. You can find more information in our new Refined Products Outlook service. For those of you that would like access, don't hesitate to get in touch at oil.products@argusmedia.com. Catch you next time.