Earlier this week, Vitol boss Russell Hardy warned that a diesel shortage could trigger fuel rationing in Europe. Now those warnings are multiplying, and fuel rationing no longer looks like an abstract idea. Europe is risking a blow to its economic growth, Reuters reported Thursday, citing experts. Diesel is used in freight transport to deliver goods to consumers, but also as a fuel in industrial transport. As Russian refiners cut processing rates after several waves of Western sanctions, the already tight supply of diesel will become even tighter.
“Governments have a very clear understanding that there is a clear link between diesel and GDP because almost everything that goes in and out of a factory runs on diesel,” said the Director General of Fuels Europe, part of the European Petroleum Refiners Association Reuters this week.
As Vitol’s Russell Hardy noted earlier this week, “Europe imports about half its diesel from Russia and about half its diesel from the Middle East.
But not only Europe is feeling the shortage of diesel. Middle distillate inventories are also declining in the United States, wrote Reuters’ John Kemp in his latest column.
Distillate inventories have seen weekly declines for 52 of the past 79 weeks, according to EIA data, Kemp reported, falling to 112 million barrels last week. The total drop over the past 79 weeks is 67 million barrels. Inventory levels last week were the lowest since 2014 and 20 percent lower than the five-year pre-pandemic average.
“Diesel isn’t just a European problem, it’s a global problem. It really is,” Torbjorn Tornqvist, co-founder and chairman of Gunvor, said at this week’s FT Commodities Global Summit.
See Also: US Oil Production Recovery Accelerates
Amrita Sen of Energy Aspects echoed this sentiment, saying that the worst-hit oil product was the diesel shortage, noting that Europe was importing nearly 1 million barrels of Russian diesel per day and that at the time of the Russian invasion of Ukraine, stocks of the fuel were low were already well below the seasonal average.
The problem seems to be that when Russia invaded Ukraine, the world was already running out of diesel supplies and the West responded with sanctions that, albeit indirectly, targeted its energy industry. In addition, according to Vitol’s Hardy, there has been a switch from petrol to diesel in Europe, which has further exacerbated the problem.
Then there are the commodities traders, who avoid Russian diesel because of sanctions, payment difficulties and transport problems, as many European ports have banned Russian ships from docking.
TotalEnergies is the latest: the French supermajor has said it will suspend purchases of Russian diesel “as soon as possible and by the end of 2022 at the latest,” the company said, unless it receives other guidance from European governments.
Instead of Russian diesel, TotalEnergies said it would switch to other suppliers, most notably Saudi Arabia. It will hardly be the only one looking around for alternative providers. It looks like a hunt for diesel is in the making, if not already in full swing.
Meanwhile, alternative suppliers may not have enough to respond to the surge in demand in the near term: Saudi Arabia is already Europe’s second largest supplier of diesel after Russia, but compared to its 50 per cent share of the EU diesel import market, only the kingdom has a share of 12 percent.
Also Read: Oil Rises as Videos Emerge of Attack on Saudi Oil Facility
According to Kemp’s report, Asian diesel supplies are also tighter than usual, meaning all major middle distillate markets are experiencing shortages. This is driving all oil prices higher, Kemp noted in his column, but this is just the beginning of a bigger problem.
Besides freight transport, diesel is the fuel used to power mining and agricultural equipment and is also used in manufacturing. With higher fuel prices, end product prices will also rise, fueling inflation, which is a major headache for Europe and the United States.
Another option would be to boost local diesel production, but experts say they would buy their crude at higher prices and the end product would be even more expensive. Additionally, it will take some time for this ramp-up in middle distillate production to materialize.
“In the next three months, diesel production needs to accelerate significantly, consumption growth needs to slow, and the market needs to avoid a significant loss in Russian exports,” Kemp wrote. That would be a best-case scenario, and if it doesn’t happen, Europe in particular is at risk of “a sharp rise in prices” that would lead to a collapse in demand.
However, before demand collapses, inflation could hit double digits 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
Other top reads from Oilprice.com: