The tight European diesel market is set to become even tighter early next year when the EU ban on Russian seaborne oil product exports is planned to kick in. Among other energy product shortages this coming winter, the EU will have to contend with no supply of diesel from Russia—still a major supplier of diesel to Europe—if the bloc follows through with its plans for an embargo on all Russian oil shipped by sea as of early February 2023.
The embargo is set to upend global oil product trade flows once again, made worse by an even tighter European diesel market during the winter when oil products are set to be used in oil-fired backup power plants amid a power and natural gas crunch.
Europe has already started to tap the U.S. diesel market for increased non-Russian supply, but, as U.S. refining executives themselves admit, there isn't too much room to substantially boost American diesel exports to Europe as U.S. inventories of distillate fuels continue to sit at multi-year lows.
One potential savior of Europe's diesel market could be China, which has aligned with Vladimir Putin and is growing increasingly close to Russia. In theory, China has the refining capacity to process and export more fuels, but Chinese authorities have been reducing the allocated fuel export quotas this year.
Of course, there is the geopolitical side to China boosting its fuel exports. Even if it didn't send diesel shipments to Europe, it could, in theory, ease diesel market shortages elsewhere. The question is whether China would be willing to help Europe and undermine Putin's oil revenues, as Reuters's Asia Commodities and Energy Columnist Clyde notes.
Europe is still importing relatively high volumes of Russian diesel, several months before the embargo enters into force. Europe imported 543,000 barrels per day (bpd) of Russian seaborne diesel last month, up from 520,000 bpd in August 2021, per commodity analysts Kpler cited by Russell.
In July, European diesel imports from Russia rose to an unseasonably high level of 680,000 bpd, up by 13% month-on-month and 22% year over year, and outpacing non-Russian supplies by about 200,000 bpd, data from energy analytics firm Vortexa showed last month.
China, for its part, issued the latest batch of fuel export quotas for refiners in July, and total quotas so far this year are 39 percent lower than the collective quotas this time last year—a sign that Chinese fuel exports are unlikely to ease the tight fuel market globally.
"China also has the power to change the fate of the global diesel market, if it were to ease off the brakes on rationalising its domestic refining industry," Vortexa Chief Economist David Wech wrote at the end of August.
The sector has run so far 7% lower this year than in January-July 2021, per Argus, and has ample spare capacity, which is expected to grow further with the current startup of the 320,000-bpd Lianyungang grassroots refinery, Wech added.
The U.S. can't help much, either, executives said earlier this summer. Distillate fuel inventories in America are now about 23% below the five-year average for this time of year, according to the latest EIA weekly petroleum status report.
According to U.S. refiners, there isn't much room for a further increase in diesel shipments from America to Europe.
Gary Simmons, Executive Vice President and Chief Commercial Officer at Valero Energy, said on the Q2 earnings call at the end of July that "It's going to be a real challenge for us to be able to supply a lot more diesel into Europe."
With U.S. inventories low and "the industry basically running all out," "it's very difficult for me seeing that there's going to be a lot of flow from the U.S. into Europe," Simmons added.
Amid tight global fuel markets, especially diesel, Europe's success in cutting off seaborne diesel imports from Russia could hinge on China's fuel export policy and geopolitical choices.
By Tsvetana Paraskova for Oilprice.com
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