Recent data from the London Stock Exchange Group (LSEG) shows that jet fuel cargoes arriving in Europe are priced $24 per tonne lower than diesel futures. This marks the widest discount since July 2025 and signals a market reversal where diesel prices have surpassed those of jet fuel.
Under normal seasonal cycles, the price spread between European jet fuel and diesel typically fluctuates between -$5 and $2 per barrel; however, this year, the spread has surged due to the escalating crisis in the Strait of Hormuz. This anomaly reflects more than just a simple geopolitical premium or seasonal fluctuation; it points to a deep-seated structural imbalance in the European energy market.
Refined product prices have decoupled from crude oil, and price differentials have spiraled out of control amidst geopolitical shocks. On the surface, the Strait of Hormuz crisis has dealt the most direct and devastating blow to Europe's jet fuel market. The strait accounts for approximately 30% to 40% of Europe's jet fuel imports, yet no shipments have passed through it since the conflict began. Nevertheless, thanks to expanded U.S. production capacity, supplies from West Africa, and the release of strategic reserves, the European jet fuel market has demonstrated considerable flexibility and resilience, limiting the impact of the blockage. Goldman Sachs recently noted that Europe is capable of securing alternative sources to replace jet fuel from the Middle East.
The situation for diesel, however, is starkly different. As a core fuel for European industrial manufacturing and agriculture, diesel demand is highly inelastic. When global trade routes are disrupted by the Middle East conflict, there are extremely limited alternative sources capable of rapidly filling the supply gap. Goldman Sachs has warned that Europe faces significant challenges in securing additional diesel supplies. This disparity in resilience between energy products facing the same geopolitical crisis—contrasting the diesel and jet fuel markets—demonstrates that the global energy supply chain is not a monolithic entity but is instead highly fragmented.
Refining capacity remains in a long-term slump, exacerbating diesel scarcity as jet fuel demand squeezes supplies. The vast differences in supply resilience among refined products stem from the long-term contraction of Europe's domestic refining capacity. Over the past two decades, global refining capacity has grown by approximately 16%, whereas Europe has bucked the trend, seeing a decline of about 20%. Numerous refineries have shut down due to razor-thin margins, pressure from environmental regulations, and the anticipated energy transition. In 2024, 60% of the refining capacity closures in the EU involved diesel production units. Following the shutdown of 170,000 barrels per day of capacity at Germany’s Miro refinery, diesel inventories at the Port of Rotterdam remained below safety thresholds for 42 consecutive days.
The permanent closure of numerous refineries has made it difficult for refined product output to keep pace with the post-pandemic economic recovery. Constrained by existing capacity, refineries frequently face conflicting priorities regarding product output; with the aviation sector seeing a strong demand rebound, oil companies have been forced to prioritize limited processing capacity for gasoline and jet fuel, thereby deprioritizing diesel production. This "robbing Peter to pay Paul" approach to capacity allocation has resulted in a distinct scarcity premium for diesel. Goldman Sachs has noted that, as winter approaches, the risk of diesel prices maintaining a scarcity premium remains higher than that for crude oil. When fuel producers must choose between jet fuel and diesel, their decisions reflect the broader industrial system's anxiety over the insufficient capacity for middle distillates. While the outbreak of geopolitical conflict has exposed Europe's structural energy vulnerabilities to market pricing, the underlying collapse in refining capacity was a long time in the making.
The recent surge in diesel prices—pushing them above those of jet fuel—also highlights a profound paradox in Europe's energy transition strategy. Since the outbreak of the Russia-Ukraine conflict, the EU has drastically cut oil imports from Russia in an attempt to bolster energy security through "de-Russification." However, this has not eliminated the vulnerability of Europe's energy system; instead, it has shifted reliance from Russia to a heavy dependence on the United States and Norway.
Amid the crisis in the Strait of Hormuz, Europe—while largely having shed its dependence on Russia—has found itself reliant on Middle Eastern shipping routes and US supplies; even jet fuel, which has shown relative price stability compared to diesel, faces significant supply uncertainty due to this high external dependency. Data indicates that approximately 60% of the kerosene currently used by aircraft in Europe is imported; Fatih Birol, Executive Director of the International Energy Agency (IEA), has warned that Europe's aviation fuel reserves could last only about six weeks. The structural contradiction in Europe's energy security lies in its failure to establish a truly diversified and resilient supply system; instead, it has merely "shifted anchors" between different geopolitical risks, with each substitution bringing new dependencies and new hazards.
The fact that diesel prices have surpassed those of aviation fuel is closely linked to the competition for resources between Europe's energy transition and traditional energy markets. The EU's vigorous promotion of sustainable aviation fuel (SAF) blending has—in effect—intensified the aviation industry's fierce scramble for limited biological feedstocks, further exacerbating the overall tightness of the middle distillate market.
While Europe aggressively pursues a green energy transition at the policy level, it faces a market-level dilemma where the shift to clean energy is undermining traditional energy supplies. Policy-driven decarbonization in the aviation sector has indirectly squeezed the feedstock availability for essential fuels like diesel. A fierce battle for feedstocks is unfolding between the policy goals of the green transition and the market realities of securing traditional energy supplies. This misalignment between policy and market forces has prevented the energy transition from achieving an ideal replacement of old energy with new; instead, it has devolved into a zero-sum game between the two.
Looking ahead, the structural imbalance in Europe's energy market will continue to evolve. In the short term, the scarcity premium on diesel will persist. As the Northern Hemisphere enters the heating season, diesel demand will face a "triple whammy" of needs from industry, agriculture, and residential heating. Against a backdrop of insufficient domestic production capacity and limited import alternatives, the trend of diesel prices exceeding those of aviation kerosene is likely to intensify.
In the medium term, the issue of underinvestment in global refining capacity is unlikely to be resolved quickly, particularly as new refinery projects face significant constraints from environmental policies and capital expenditure pressures. Europe's reliance on imported middle distillates will show a persistent upward trend, and the structural shortage of essential fuels like diesel may shift from a temporary anomaly to a market norm.
In the long term, the international energy market will enter a critical phase where new energy sources increasingly displace old ones. On one hand, policy-driven demand for clean fuels—such as sustainable aviation fuel and biodiesel—will intensify competition for feedstocks; on the other, the gap between the need for transition and the underinvestment in traditional fossil fuels will continue to widen. Shell’s CEO stated, "The optimal energy strategy should look five to ten years ahead and build system resilience starting now." This implies that future energy markets will no longer pursue a singular goal of being "clean" or "secure"; instead, they must strike a new balance between the pace of transition and supply resilience.
The fact that diesel prices have surpassed those of jet fuel serves as a mirror, reflecting Europe’s deep-seated struggles with shrinking production capacity, geopolitical turmoil, and the painful throes of transition. As price signals transform from genuine reflections of supply and demand into symptoms of structural imbalances, what the European energy market urgently requires is not merely short-term supply adjustments, but a systemic restructuring—spanning everything from production capacity layout and geopolitical strategy to policy design and market mechanisms. (Source: Economic Daily)
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