Bank says elevated prices are needed to keep recovering demand from overwhelming constrained refineries

Diesel prices may need to stay high through 2027 as refinery constraints collide with recovering consumption and with governments and companies rebuilding depleted inventories, according to Goldman Sachs.

“We need to keep product prices high enough to have a certain level of demand destruction continuing next year,” Nikhil Bhandari, Goldman’s co-head of Asia-Pacific natural resources research, said Monday on CNBC’s “Squawk Box Asia.”

The bank says high diesel prices are needed to prevent a rebound in demand from overwhelming refineries that are already stretched.

Crack spreads to double

Goldman forecasts that global diesel and jet-fuel crack spreads, the premium refined products command over crude oil, will average above $40 per barrel in 2027. That is more than double the usual level of about $20.

The forecast comes even though Goldman expects Brent crude to stabilize at about $80 per barrel as recent crude flows through the Strait of Hormuz gradually normalize.

“If there is any demand rebound next year, we think the global refining system will have to hit the highest utilization rate that we have seen in the last two decades,” Bhandari said.

Baden Moore, a resources and energy research analyst at brokerage CLSA, said recent weakness does not necessarily mean demand has been permanently lost.

“Underlying oil-product demand remains largely intact,” Moore said in an email to CNBC. He said buyers have balanced the market through inventory management, reserve drawdowns, reduced consumption and refinery optimization.

Moore added that replenishing global inventories while also meeting demand could take up to two years.

Strained refining network

Goldman said a recovery in refined product demand could also run into a strained refinery network.

The bank expects 2026 to be another year of “negative refining capacity growth,” with capacity outside China projected to shrink by about 300,000 barrels per day.

Goldman estimated that product inventories could end 2026 below the lowest days-of-supply level recorded since 2015, according to its global Refining Super Cycle report, published Sept. 21.

About 2 million barrels per day of Middle Eastern refining capacity remains offline, Bhandari said, while damage to Russian facilities has further limited diesel supply.

He added that U.S. refineries, which have been running at elevated rates to offset falling capacity, will need to undergo deferred maintenance that will temporarily reduce output.

A recovery in Gulf crude exports is not expected to significantly improve the availability of refined products, because shipments of diesel, gasoline and jet fuel remain restricted.

Emergency releases offer limited relief

Bhandari’s comments came after the Group of Seven countries agreed Friday to release 100 million barrels of crude and refined products over four months. The plan includes a “front-loaded substantial diesel release” within the first 20 days.

The announcement sent European gasoil futures down 5.75%.

Experts, however, are skeptical that the additional supply will improve product availability or ease prices over the long run.

Emergency reserves “might buy us a winter” but cannot fix long-term supply problems, Saudi Aramco CEO Amin Nasser said Monday.

“Emergency releases only solve a liquidity problem, not the underlying stock problem,” Moore said. He noted that the releases buy time but mean inventories are being consumed rather than rebuilt, making restocking a longer-term source of demand.

Bernard Aw, chief economist for Asia-Pacific at Coface, agreed, saying in an emailed statement to CNBC that the impact of such releases is “temporary rather than structural.”

Prices remain well above Goldman’s forecast

Goldman’s projection of Brent at about $80 per barrel sits well below where crude trades now. Brent futures for December delivery fell about 1.85% to roughly $100 a barrel Friday after the G7 announcement.

U.S. diesel averaged $6.37 a gallon Friday, down from a record $6.52 on Sept. 22, according to AAA. The Iran war has driven those elevated costs.

Export threat shaped the G7 deal

The G7 statement called for a coordinated release of 100 million barrels through the International Energy Agency, starting immediately and running four months. It did not say how much diesel each country would contribute.

The Trump administration had pressed Europe to release its diesel stocks. Washington also threatened a U.S. ban on diesel exports otherwise, and a European Commission spokesperson said the EU categorically rejected the threat. Europe has stepped up purchases of American diesel over the past year.

The leaders reaffirmed a commitment not to restrict energy exports among G7 members and urged producers to do the same. They also agreed to coordinate refinery maintenance schedules to avoid simultaneous shutdowns. The G7 also called on Iran to end its blockade of the Strait of Hormuz.

Reserves already tapped this year

The new release follows an earlier, larger one. IEA member countries agreed in March to coordinate the release of a record 400 million barrels of strategic reserves.

Hormuz disruption at the root

Nasser has said the market has lost about 1 billion barrels of oil supply since the U.S.-Israel-Iran war began Feb. 28. In May he called it the largest energy supply shock the world has ever experienced.

He said at the time that Hormuz traffic had fallen from about 70 vessels a day to between two and five. He also expected a return to normal shipping to trigger rapid restocking of strategic reserves and commercial inventories. That is the same dynamic Goldman and CLSA now describe as a source of demand through 2027.

Aramco has said it can reroute part of its exports, but called the workarounds temporary and no substitute for reopening the strait. Aramco has also been studying a bigger export push through the Red Sea port of Yanbu.

What to watch

Analysts say the recovery path depends on three things: how quickly Gulf shipping normalizes, whether the emergency barrels reach the diesel market quickly enough to matter, and whether refiners can run harder without deferring maintenance. Goldman’s view is that the refining system will have little room for error even if crude flows recover.