Diesel: One Week, Three Shocks, More War?

Three shock announcements from President Trump rocked the world this past week. First, a diesel deal with Russia to waive US sanctions on sales to buyers in US and elsewhere. Second, a public statement that President Zelenskiy should be replaced so Ukraine can pursue peace. Third, Trump’s announcement that war with Iran will intensify ‘soon’. The three announcements are related.

Some context is needed to understand where we are. 14% of global diesel refining capacity is now offline, double the seasonal average. Russia diesel production is down 30% year-on-year, peak 50%, forcing an export ban in July to protect domestic supply. US diesel inventories are at their lowest seasonal level since records began in 1982. Midwestern US electricity generation and Northeastern winter home heating are both under threat. Diesel crack spreads over crude hit a peak of $118 while diesel at the pump surged to over $6 per gallon. Global diesel is scarce, prices surging, but as ever, the US military has priority over civilian welfare.

The diesel deal is for 300,000 metric tonnes immediately (2.25 million barrels), 500,000 metric tonnes in November, a further 1,000,000 tons to follow shortly, and possibly 3,000,000 more to April 2027 (when the OFAC license waiver expires). The 3,000,000 intended for 2027 is contingent on Russian refineries recovering distillate capacity after Ukraine damaged 30-36 major refineries,. Only 5 major Russian refineries remain undamaged, all in the far east beyond range of Ukrainian drones.

Zelenskiy’s refusal to follow repeated demands from Trump to stop targeting Russian refineries may be his undoing. Trump publicly ordered Zelenskiy to “stop knocking out diesel fuel” on 13 September, in Ireland. Ukraine responded to Trump’s order by widening its attacks, striking 10-12 more major refineries. In recent weeks Ukraine escalated drone strikes to secondary refining units (fluid catalytic cracking, hydrocracking, reforming units) which determine diesel and jet fuel yields. The repair cycle for secondary refining units is 6-8 months, far longer than the 1-2 weeks for crude distillation units. This explains why the 3,000,000 exportable volume is conditioned on refinery recoveries that can take months or years, not weeks.

Overnight 13 October, Starlink/Starshield throttled communications to terminals moving at 160km/h, and then further to terminals moving at just 60-70km/h. The throttling undermines Ukraine’s ability to target drones and other operations in contested front lines and occupied Ukrainian territories. At the lower threshold a wider range of reconnaissance, tactical, and other UAVs are compromised.

While most of the focus is on Trump’s effort to influence the Midterm elections by lowering fuel prices on gas station forecourts, Trump’s announcement of new operations against Iran may be the real driver of the Russian diesel deal and Ukraine’s Starlink disruption.

It was revealed this morning by Axios and Israel’s Channel 12 that Trump and Netanyahu had two calls to agree the new operations, possibly before Israel’s 27 October elections or, more likely, after the 3 November Midterms. Trump confirmed the planned escalation in a 14 October press briefing outside the White House, saying ‘patience has run out’ and he will ‘teach Iran a harsh lesson’. The day before in Wasilla, Alaska, he told a rally audience, “Wait till you see what we do to Iran. We’re going to do a number. . . We’ve sort of had it”.

The US military is the largest customer of diesel and jet fuel on the planet. Intense US-Israeli naval and airstrike operations against Iran require stored reserves for the US Navy and Air Force resupplied to regional airbases or refuelling fleets in advance of operations. If Trump had wanted only to influence elections, all the Russian diesel would be flowing to US ports. Exports to other markets will not be motivated by Trump’s kindness or concern for global shortages.

From that viewpoint where and when Russian diesel is delivered is much more important than the size of the deal. 4.8 million metric tonnes covers just 10 days of US consumption. Goldman Sachs estimates it would reduce diesel prices by just $1 to $2 per barrel, incapable of lowering pump prices for the Midterm. This makes military stockpiling much more likely as Trump’s true motivation.

Director of the CIA John Ratcliffe made a sudden, uninvited visit to Moscow in August. Both US and Russian intelligence authorities were quick to characterise the resulting talks as routine, nothing out of the ordinary. Intelligence historians noted that such direct meetings are used to convey sensitive information outside diplomatic channels, consistent with the preceding visit of DCIA William Burns to Moscow in 2021 warning against invasion of Ukraine. For 300,000 metric tonnes of diesel to be delivered ‘immediately’ now it might have been requested for export in August.

The speed of the Trump-Putin deal was facilitated by a legal exception in the July diesel export ban for ‘intergovernmental agreements’. Trump and Putin merely needed to authorise the deal at the presidential level to avoid the ban. Stockpiling at ports for export takes longer. Russian oil companies were ordered within 24 hours to ‘immediately begin negotiating export contracts’ to undisclosed US companies.

We should watch where the 300,000 tonnes of diesel to be delivered ‘immediately’ ends up, where cargoes are offloaded or transhipped. If the Russian diesel goes to fuel storage at Akrotiri, Incirlik, or Diego Garcia Airbases instead of to New Jersey it may signal impending renewal of conflict in the Persian Gulf.