Europe’s diesel crisis is far from over

Europe’s diesel crisis will worsen in the coming months as more European refineries close for maintenance this month and unplanned outages reduce supply. European fuel demand will attract additional imports from other regions, further tightening already tight global markets for refined products. The expected tightening of the diesel market in Europe will come just as the EU prepares to ban the import of Russian refined oil products by sea from February 2023.

More European refineries offline

Benchmark diesel profit margins in Europe rose last week to the highest level in two weeks, according to Reuters estimates, while analysts and traders said Reuters that diesel prices are going to rise in the midst of an increasingly tight market.

In October, Europe’s major refineries will undergo planned maintenance, taking a total of 1.5 million barrels per day (bpd) of capacity out of service, according to estimates by Energy Aspects cited by Reuters. That’s higher than September’s capacity under maintenance and above the five-year pre-COVID average.

Then there are the unplanned outages, like the current refinery outage in France due to a strike by refinery workers over wage disputes. More than half of France’s refinery capacity is currently out of service due to strikes. Traders of diesel and other products in Europe are concerned that the uncertain timing of that capacity’s return will further tighten the market just ahead of the EU embargo on Russian oil products early next year.

Related: Shell, Aramco: No quick fix for tight oil market

Wood Mackenzie analyst Mark Williams doesn’t expect diesel stocks to rise from current levels.

“We expect prices to really spike … mid-January, probably February, but we may see a spike a little bit sooner when the market starts to panic,” Williams told Reuters.

Europe seeks to replace Russian fuel imports

Europe still matters a lot of diesel from Russia, months before the embargo, and paying more for the fuel than for that supply in May. But it is also looking to import more diesel from Asia and the Middle East, like the flows noted by oil analytics firm Vortexa in early September. He showed.

Despite US domestic diesel stocks at critically low levels, exports of seaborne refined products from the US Gulf Coast have risen in recent months, supported by growing demand from the main consumers in Latin America and Europe, who are looking for replacement barrels for the Russian ones. diesel, Pamela Munger, Senior Market Analyst at Vortexa, wrote In the past week.

Industrial demand, a strong harvest season and power generation are drawing diesel supplies to Latin America. Europe has also increased diesel imports from the US Gulf Coast in the four consecutive months through September. This has given US refiners a strong incentive to maximize diesel output in the second half of this year and beyond, says Vortexa’s Munger.

The Biden Administration has once again floated the idea of ​​limiting US fuel exports in order to reduce domestic fuel prices. The industry warns that any artificially imposed limits on US fuel exports could lead to potential cost increases, refinery closures, job losses and productivity declines in the US, and will only exacerbate the global supply shortfall.

Global diesel markets will remain in deficit

While the crude oil market could still be in surplus, even with the EU embargo and Russian oil price cap, “commodity markets, especially diesel, are expected to remain in deficit due to price constraints.” downstream capacity outside of China,” the International Energy Agency. (IEA) said in its latest Oil Market Report in September.

“Until now, the EU has largely kept Russian diesel import volumes at around 600 kb/d, but from next February these volumes will need to be replaced by other sources,” the IEA said.

“The proposed price cap mechanism should also work to ensure that the overall supply of diesel for the global market is met and that European importers can switch to flows from the US, the Middle East and India. Otherwise, and assuming Russia is unable to ship diesel in significant quantities outside the price cap, European, Latin American and African importers could be competing for a smaller pool of available flows.

One potential savior of the tight global commodity market could be China, which has just issued its largest fuel export quotas to its refiners for this year. More fuel exports from China could ease the global commodity market ahead of the EU’s embargo on imports of Russian crude oil and refined products by sea.

However, diesel markets will remain tight, analysts say.

“Global diesel fundamentals remain strong, despite a cooling from the seasonal peak in the second quarter. Demand will be primarily led by Europe, which has seen diesel loads in the region rise steadily to a four-month high of 1.9mbd on 1H September,” Serena Huang, director of APAC analysis at Vortexa. said a week before the issuance of Chinese fuel export quotas.

Despite recent buildups in diesel inventories in Fujairah, Singapore and the US, stocks are still well below the five-year average.

“Besides the outlook for China’s diesel exports, the other big wild card that could change the market would be how cold Europe’s winter will be this year,” Huang said.

By Tsvetana Paraskova for Oilprice.com

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