By Neven Valev, February 2, 2023

Each month we compare the actual level of gasoline and diesel prices with what fundamentals - the price of oil, exchange rates, and the seasons - would suggest. The comparison is carried out for about 100 countries where prices are largely market determined. In all of them, historically the retail fuel prices closely follow the changes in oil prices. Therefore, one can say with a high level of confidence what the retail prices should be given the current oil prices.

Typically, the difference between the actual and the expected level of fuel prices is about zero which means that prices are where they should be. In the last three months, however, the actual prices for diesel fuel have been higher than the price levels justified by fundamentals. The difference was 0.06 percent in October 2022 and increased to 3.86 percent in November. It was 2.80 percent in December and 3.87 percent in January. During the same time, the difference for gasoline prices remained very close to zero.

This suggests that the market for diesel is relatively tight. Supply disruption in a few refineries have been a contributing factor but the key reason is the impending ban by the European Union on diesel imports from Russia. Europe has been stockpiling diesel fuel in anticipation of the ban and this additional demand has pushed prices higher.

Three months ago, actual prices were greater than expected mostly in Europe. Then, the premium spread to other countries. This suggests that global supply is gradually rerouted to Europe creating market shortages elsewhere. But the rerouting is underway.

Also, we should note that while the diesel prices have been higher than expected, the difference is not large or growing. We could have observed a 10 percent or even higher spread but the difference has hovered around 3-4 percent. This indicates that the ban would probably come into effect without major price hikes for diesel fuel. Even if there are some disruptions, they will most likely play out within a few weeks.