Diesel squeeze set to last well into 2027 as Iran war disrupts supply, IEA says

Published Wed, Oct 14 2026 4:00 AM EDT

By Chloe Taylor

The International Energy Agency (IEA) has issued a warning that the constraints in the diesel market will extend well into the latter part of 2027. This conclusion was presented in the IEA's October Oil Market Report, highlighting a continued tightness in supply.

The report outlines that a counter-seasonal tightening in the gasoil markets during the third quarter, combined with significant inventory declines in the previous three months, has left global gasoil markets without essential stock cover ahead of the peak winter demand season.

In September, global diesel exports experienced a decline of 700,000 barrels per day compared to the same period last year, according to IEA data. The depreciation in supply from Russia and the Middle East, amounting to a loss of 1.3 million barrels per day, has only been partially compensated by increased supply from alternative sources.

Although rising prices have typically resulted in decreased oil demand, the IEA noted that "relatively price inelastic diesel demand has remained robust," buoyed by government initiatives intended to alleviate high prices for consumers.

"Falling inventories, soaring cracks, and steepening levels of backwardation have indicated the necessity for increased supplies," the report states. "However, even with a swift recovery anticipated in refinery throughput by year-end, gasoil supply is expected to fall short of meeting demand in the fourth quarter of 2026, suggesting that inventory restoration, apart from regular seasonal fluctuations, is unlikely prior to the second half of 2027."

Wholesale diesel prices surged past $200 a barrel in Singapore mid-September, reaching unprecedented levels of approximately $220 per barrel in both Europe and the United States. "Retail diesel prices have similarly escalated to record highs across most major economies," the report indicated. It cautioned, however, that ongoing tensions in the crude freight market could lead to further increases in delivered diesel prices across significant gasoil importing regions including Europe, Africa, and Latin America.

Trump strikes Russian diesel deal to ease consumer squeeze

U.S. diesel prices reached $6 per gallon for the first time in the previous month, as the ongoing Iran war continues to impact global energy dynamics. Market analysts have expressed concerns that elevated prices might persist for an extended period.

Last week, U.S. President Donald Trump announced an agreement with Russian President Vladimir Putin to facilitate the immediate supply of 300,000 metric tons of diesel from Russia to the global market, aimed at alleviating the sharp price increases resulting from supply constraints linked to the Iran situation.

Western governments have imposed significant sanctions on Russian energy since Moscow’s full-scale invasion of Ukraine in 2022. Trump's arrangement with Putin has drawn bipartisan criticism in the U.S., with European lawmakers also condemning the move. During the IMF meetings in Bangkok on Wednesday, Valdis Dombrovskis, the European Commissioner for the Economy and Productivity, stated, "now is not a time to ease sanctions on Russia."

He remarked, "If we discuss this diesel deal specifically, it's worth noting that the volumes being discussed will not have any macroeconomic significance, and the key concern is whether Russia can actually deliver them."

Italian Prime Minister Giorgia Meloni also expressed concerns on Wednesday, stating that the deal undermines efforts to encourage Putin's engagement in negotiations concerning Ukraine.

Oil demand destruction

The IEA projects that global oil demand will decline by an average of 2.6 million barrels per day in 2026, with diesel accounting for 25% of that anticipated decrease.

Conversely, oil supply is expected to show an average annual decline of 5.8 million barrels per day this year, followed by a projected increase of 7.7 million barrels per day in 2027.

However, the IEA also cautioned that "renewed attacks in the Gulf leave the recovery fragile."

In recent days, Riyadh, the Saudi capital, has suffered multiple attacks attributed to Yemen's Houthis, with some strikes resulting in fatalities. On Wednesday, Saudi officials reported that a building belonging to oil giant Saudi Aramco was targeted overnight.

The IEA stated in its report that assaults on Saudi Arabia could jeopardize the ongoing market recovery, as increased production from the kingdom in September contributed to overall OPEC+ supply gains for that month.