Global diesel markets are faced with the most severe supply squeeze in years as refinery outages linked to conflicts in the Middle East and Russia drive global refining activity to its lowest level for this time of year since the COVID-19 pandemic, according to Goldman Sachs.

The investment bank said diesel has become the “epicentre” of the global fuel shortage, with shrinking refinery output tightening supplies even as crude oil production remains relatively resilient.

Goldman Sachs analysts estimated that global refining throughput in July has fallen by as much as 6.5 million barrels per day (bpd) compared with the same period last year.

The decline reflects lower refinery runs in China alongside war-related disruptions across the Middle East and Russia.

The sharp drop in refining activity has hit diesel hardest. According to the bank, global diesel exports have declined by around 35 percent, or approximately 2.6 million bpd, this month, leaving inventories below seasonal norms and increasing the risk of further supply shortages.

The tightening diesel market comes despite extreme volatility in crude oil prices over recent months. While Brent crude briefly surged above $100 per barrel amid escalating geopolitical tensions before easing on renewed diplomatic efforts between the United States and Iran, refining margins have remained near record highs, reflecting stronger demand for refined products than available supply.

Analysts said the imbalance highlights a widening disconnect between crude availability and the capacity to convert it into usable fuels such as diesel, gasoline and jet fuel.

Although higher refinery output in North and South America as well as Africa has partially offset lost production, Goldman Sachs estimated those regions have replaced only about one-third of the supply lost from conflict-affected refineries.

The International Energy Agency (IEA) has also warned that refined fuel markets are significantly tighter than crude markets.

In a rare public intervention last week, Fatih Birol, IEA Executive Director, said refinery activity had failed to recover in line with crude production.

“Refinery activity and product supplies have not picked up as much as crude deliveries, meaning that markets for refined oil products, including diesel and gasoline, are considerably tighter than those for crude,” Birol said.

The tightening diesel market has significant implications for the global economy because the fuel powers freight transport, shipping, mining, agriculture and heavy industry. Prolonged supply shortages could keep freight costs elevated, reinforce inflationary pressures and increase energy costs for businesses worldwide.