Earlier this week, Vitol's chief Russell Hardy warned that a diesel shortage could trigger fuel rationing in Europe. Now, those warnings are multiplying, with fuel rationing no longer looking like an abstract idea. Europe is risking a blow to its economic growth, Reuters reported on Thursday, citing experts. Diesel is what freight transport uses to deliver goods to consumers, but it is also what industrial transport uses for fuel. With Russian refiners cutting their processing rates in the wake of several waves of Western sanctions, already tight diesel supply is going to get a lot tighter.
"Governments have a very clear understanding that there is a clear link between diesel and GDP, because almost everything that goes into and out of a factory goes using diesel," the director general of Fuels Europe, part of the European Petroleum Refiners Association, told Reuters this week.
As Vitol's Russell Hardy noted earlier this week, "Europe imports about half of its diesel from Russia and about half of its diesel from the Middle East. That systemic shortfall of diesel is there."
Europe is not the only one feeling the diesel pinch, however. Middle distillate stocks are on a decline in the United States, too, Reuters' John Kemp wrote in his latest column.
Distillate inventories, according to EIA data, have booked weekly declines for 52 of the last 79 weeks, Kemp reported, falling to 112 million barrels last week. The total decline for the last 79 weeks amounts to 67 million barrels. Last week's inventory level was the lowest since 2014 and 20 percent lower than the five-year average from before the pandemic.
"Diesel is not just a European problem, this is a global problem. It really is," said Gunvor co-founder and chair Torbjorn Tornqvist at the FT Commodities Global Summit this week.
Related: U.S. Oil Production Recovery Speeds Up
Energy Aspects' Amrita Sen echoed the sentiment, saying that the diesel shortage was the worst affected oil product, noting that Europe imported close to 1 million barrels daily of Russian diesel and that at the time of the Russian invasion of Ukraine, inventories of the fuel were already much lower than the seasonal average.
The problem seems to be that diesel stocks were already tight globally when Russia invaded Ukraine and the West responded with sanctions that, although indirectly, targeted its energy industry. In addition to that, according to Vitol's Hardy, there had been a shift in Europe from gasoline to diesel, which has further exacerbated the problem.
Then there are the commodity traders who are shunning Russian diesel because of the sanctions as well as payment headaches and transportation challenges as many European ports have banned Russian vessels from docking.
TotalEnergies is the latest: the French supermajor has said it will be suspending purchases of Russian diesel "as soon as possible and by the end of 2022 at the latest", the company said, unless it receives other instructions from European governments.
Instead of Russian diesel, TotalEnergies said it would switch to other suppliers, notably Saudi Arabia. It will hardly be the only one to look for alternative suppliers. It looks like a hunt for diesel is in the making, if not already fully underway.
Meanwhile, the alternative suppliers may not have enough to respond to the spike in demand in short order: Saudi Arabia is already Europe's second-largest diesel supplier after Russia but compared to its 50-percent share of the EU diesel import market, the Kingdom only has a 12-percent share.
Related: Oil Rises As Videos Emerge Of Attack On Saudi Oil Facility
Per Kemp's report, Asian diesel inventories are also tighter than usual, meaning all large markets for middle distillates are experiencing a shortage. This is pushing all oil prices higher, Kemp noted in his column but this is only the beginning of a bigger problem.
In addition to freight transport, diesel is the fuel used to power mining and agricultural equipment, and it is also used in manufacturing. With prices for the fuel higher, the prices of the end products will also climb higher, fueling the inflation that has turned into a major headache for Europe and the United States.
Boosting local diesel production is another option, but according to experts, they would be buying their crude oil at higher prices, and the end product will, yet again be more expensive. What's more, this ramp up of middle distillate production will take time to materialize.
ADVERTISEMENT
"Over the next three months, diesel output needs to accelerate significantly, consumption growth must slow, and the market must avoid a significant loss of Russian exports," Kemp wrote. That would be a best-case scenario and if it does not play out, Europe in particular is in for "a severe price spike" that would result in demand depression.
Before the demand depression comes, however, inflation could enter double-digit territory in some of the most vulnerable countries. And if Moscow decides to extend its demand for ruble payments for gas to its oil exports, the situation will become even more interesting than it already is, especially for Europe.
By Irina Slav for Oilprice.com
More Top Reads From Oilprice.com:
- Big Oil Is No Longer “Unbankable”
- The World Could See A Record-Breaking Oil Supply Shock
- Billionaire Koch Brothers Are Betting Big On An Electric Future
Certainly not even ahem "Europe" ahem will accept Russian Rubles for truly stupendous amounts of natural gas deemed as ahem "necessity" ahem for said Europe by Putin and I imagine many near all Russia.
I find such a circumstance still simply crazy bearish for top of the line both US crude oil and distillate fuels but also same said be true of fuel from Canada as well...let alone Mexico, Gulf of Mexico, the Caribbean, Columbia and Venezuela etc which have truly awesome amounts of both food and energy product.
Alternative producers can never be able to replace Russian energy exports now or in the foreseeable future. It isn’t Russia that is suffering. It is them who are paying the price in reduced economic growth and steep energy bills.
Things could get far much tougher for the EU economy if Russia insists on payment in rubles for its gas and other energy exports. If it refuses it could risk a disruption of gas supplies and other energy products.
If on the other hand the EU agrees to pay in rubles, this will strengthen the exchange rate of the Russian currency against other world currencies and enable Russia to circumvent the sanctions.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London