While the OPEC+ agreement to cut crude oil production and the U.S. reaction to it dominate headlines, a much more immediate crisis is getting worse by the day.
Global diesel and other distillate fuel stocks have been on the decline for a while now, and there is no reversal of this trend in sight. Demand, on the other hand, has been growing, leading to a widening shortage.
The situation has become so grave that U.S. buyers have begun snapping up diesel cargos originally sailing for Europe.
Reuters reported earlier this month that at least three tankers carrying diesel from the Middle East had changed their course mid-journey and were now traveling to the United States. And this new competition is about to intensify.
The foundation of the shortage is the gap between refining capacity and fuel demand. The pandemic saw a lot of refineries close, especially in the United States. It wasn’t just the pandemic itself—the anticipation of a boom in demand for EVs that would render a lot of refining capacity obsolete also had a part to play, as Reuters’ John Kemp noted in a column last week.
This boom has yet to materialize, however. In the meantime, fuel demand remains robust, resulting in a shortage. In Europe, there have been contributing factors, such as the French refinery workers’ strike, which has made the shortage much worse than it would have been otherwise, and the upcoming planned maintenance-related refinery closures
Europe is currently buying a lot of Russian diesel to fill the gap, but this will have to stop next February as the embargo on Russian fuels kicks in, further aggravating an already complicated situation with the supply of middle distillates in a major consuming region
Argus reported this week that Europe is in for a major diesel supply shock because of low inventories and strong demand. And the level of inventories had a lot to do with the unplanned outages at European refineries before maintenance season, including the four-week drop in French fuel output amid the workers’ strike.
On top of that, the article quoted traders as saying there has been little incentive to build diesel inventories in the current market situation: diesel is strongly backwardated right now, so from the perspective of refiners and commodity traders, there is little sense in stockpiling.
In the United States, meanwhile, distillate stocks have fallen to 106 million barrels, which is the lowest since records of these stocks began back in 1982, Reuters’ Kemp reported. Europe is doing a little better, with distillate stocks at 360 million barrels at the end of September, the lowest seasonal since 2007.
The U.S. has been exporting a lot of diesel to troubled Europe, but now things are changing, and not just because cargoes are being diverted from Europe to the U.S. coast. Refiners in the United States are bracing for a possible ban on fuel exports.
Floated earlier this year by the White House, the idea of banning fuel exports to secure supply for the local market prompted the CEO of the American Petroleum Institute and the head of the American Fuel and Petrochemical Manufacturers to warn against such a move.
A ban on exports could “decrease inventory levels, reduce domestic refining capacity, put upward pressure on consumer fuel prices, and alienate U.S. allies during a time of war,” Mike Sommers from the API and Chet Thompson of the AFPM wrote to Energy Secretary Jennifer Granholm.
Yet right now, U.S. buyers are snapping up diesel cargos from Europe in a way similar to how Europe has been snapping up LNG cargos originally meant for Asian destinations. And supply is not going up fast enough because there is not enough refining capacity for it to go up fast enough or even meaningfully enough. And this spells a lot more trouble for both Europe and the U.S., especially in the inflation department.
By Irina Slav for Oilprice.com
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