Bad for ↓
Global diesel supply keeps shrinking, and analysts expect the crunch to last into 2027. Refiners can charge more as a result. Jet fuel comes from the same part of the barrel as diesel, so Delta Air Lines is likely to face higher fuel costs alongside it.
Source: PR Newswire ↗
When one fuel runs short, every fuel from the same part of the barrel gets dearer. The companies that burn it pay more.
Diesel is running short around the world because world diesel exports in September were 700,000 barrels a day below a year earlier. Oil stocks held on land are at their lowest since at least 2016. So refiners can charge far more for every barrel of diesel they make.
Diesel and jet fuel come from the same middle slice of each barrel of crude, which refiners call distillates. Making more of one leaves less of the other, like two dishes cooked from the same pot. So when diesel is scarce, jet fuel stays scarce and expensive too.
Airlines buy jet fuel constantly and cannot switch to another fuel. Delta Air Lines faces higher running costs for as long as the shortage lasts, which forecasts put into 2027. Unless it raises fares enough to cover them, it keeps less profit on each ticket.
The International Energy Agency reported in October that world diesel exports ran 700,000 barrels a day below a year earlier in September. It does not expect stocks to be rebuilt before the second half of 2027. Refiners gain from this. US refiners are still at record margins. Airlines feel the pressure next. Jet fuel is cut from the same slice of crude as diesel, so a diesel shortage leaves little spare jet fuel. India cut its diesel export tax for two weeks from October 16 but left its jet fuel export tax unchanged, so no extra jet supply comes from that change. Delta Air Lines had $20.2 billion of revenue in the quarter to September. Its fuel bill was $4.35 billion, up from $2.57 billion a year earlier. Delta said fuel will add about $6 billion to its costs this year and cut its 2026 earnings forecast to $5.10–$5.60 a share from $6.50–$7.50.
Delta shares fell 3.7% on October 14, the day of the IEA report, and are down 4.9% over five trading days. That stretch includes October 9, when Delta missed earnings and cut its forecast because of fuel. Marathon Petroleum and Phillips 66 rose about 3% over the five days, though both fell on October 15 while Delta rose 1.9%.
Middle distillate supply could recover faster than expected. The G7 pledged on October 2 to speed up emergency stock releases, with diesel first. A clear sign of recovery would be the weekly US diesel price, $6.18 a gallon in the week to October 12, falling steadily through November.
Delta may be able to pass much of the cost on through higher fares, especially if rival airlines cut flights first. Its CEO Ed Bastian said on October 9 that the airline intends to cover the full cost of fuel through fares, and does not expect fares to fall even if fuel eases. The guidance cut shows it has not managed this so far.
When diesel prices spiked after Russia invaded Ukraine in 2022, US refiners posted record profits. Fuel costs for trucking companies and airlines jumped at the same time.
No comments yet.
Sign in to comment
Earlier connections in the same sector that share a theme with this one.