Diesel may be the next pain point in Europe’s energy crisis, with EU sanctions on Russian exports set to increase competition in an already “exceptionally tight” market, the International Energy Agency has warned.
Prices for diesel, and the relative difference to the price of crude, surged to record levels in October and are now 70 per cent and 425 per cent higher, respectively, than a year ago, according to the IEA.
“High diesel prices are fuelling inflation, adding pressure on the global economy and world oil demand,” said the Paris-based IEA.
Once an EU embargo on imports of diesel and other refined products from Russia is implemented in February, the market will tighten further, it added.
“The competition for non-Russian diesel barrels will be fierce, with EU countries having to bid cargoes from the US, Middle East and India away from their traditional buyers,” it said. “Increased refinery capacity will eventually help ease diesel tensions. However, until then, if prices go too high, further demand destruction may be inevitable for the market imbalances to clear.”
Upward pressure on prices for diesel — a workhorse fuel that is key for economic growth — has been growing for much of the year.
Diesel markets were already stretched before Russia’s invasion of Ukraine because of the closure of 3.5mn barrels a day of refinery capacity since the start of the Covid-19 pandemic, the IEA said. The disruption of Russian shipments and lower-than-normal Chinese exports have further crimped supply just as demand for the fuel revived after the easing of pandemic restrictions in most of the world.
Global supply problems have been exacerbated in recent months by industrial action at European refineries. Walkouts over pay at several refineries in France led to fuel shortages across northern France in October and at one point helped to propel diesel prices in the main European trading hub of Rotterdam to more than $80 higher than the price of crude oil, the IEA said.
With the cost of living rising, further industrial action is anticipated. Workers at ExxonMobil’s 270,000 b/d Fawley plant in the UK have announced a walkout for late November, while workers at BP’s 380,000 b/d Rotterdam facility have also threatened to strike.
High diesel prices, combined with a weak Chinese economy, Europe’s energy crisis and a strong US dollar, were already “weighing heavily” on consumption, according to the IEA. Global oil demand is forecast to fall by 240,000 barrels a day in the fourth quarter compared with last year, it said.
EU countries, by October, had already reduced crude imports from Russia by 1.1mn b/d and diesel imports by 50,000 b/d. When the embargoes on imports of Russian crude and refined products come into full force in December and February, respectively, Europe will have to replace an additional 1.1mn b/d of crude and 1mn b/d a diesel, naphtha and fuel oil, according to the IEA’s calculations.
While Russia has managed to redirect all crude shipments rejected by Europe so far, it has been forced to cut exports of refined products by 400,000 b/d since the start of the year, the IEA said.
US-led efforts to introduce a price-cap mechanism to allow some trade in Russian oil to continue “may help alleviate tensions, yet a myriad of uncertainties and logistical challenges remain”, it added. “Products trade in particular is facing uncertainties.”
