The global diesel crisis will get worse

Despite signs of weakening economic growth globally, regional diesel markets are stretched and could tighten further when winter arrives and when Europe bans imports of Russian crude and fuels. Distillate stocks are low in the United States and Europe. Stocks in the United States have not risen this summer as usual, and in a month since the end of June, they have seen the largest decline for this time of year in at least 32 years. Europe’s fuel market is even tighter as industries and utilities seek to switch to petroleum products from natural gas, whose prices are at record highs after Russia cut deliveries to the EU and shown that it could not be considered a reliable energy supplier.

Over the next few months, shortages could worsen when the heating season begins, coinciding with the EU’s planned ban on imports of Russian marine fuels in early 2023.

The United States is exporting increasing volumes of diesel to Europe, but it is unlikely to increase its flows much higher as US inventories are also well below seasonal averages while refineries are already operating at near levels. of their capacity.

U.S. distillate inventories fell 2.4 million barrels in the week to July 29 and are about 25% below the five-year average for this time of year, according to the latest report. EIA Inventory Weekly. show this week.

At 109.3 million barrels as of July 29, the inventory of diesel, fuel oil and other distillate fuels is currently at its lowest level for this time of year since 1996, according to analyst estimates from Reuters market. John Kemp.

Typically, distillate fuel inventories in the United States increase during the summer season as refiners process crude into more gasoline to meet summer driving season demand. But that has not been the case this year. In fact, distillate inventories fell in July by as much as 3 million barrels, the biggest seasonal drop since at least 1990, Kemp notes.

In Europe, the impending EU embargo on Russian crude and products is prompting traders to source increasing amounts of diesel from non-Russian sources. The United States was one such source, and its exports reached 1.4 million bpd in July, highest in five years. Much of the increase comes from Europe.

Europe itself hasn’t made any significant headway in reducing its diesel imports from Russia – it actually increased Russian diesel imports in July, according to data from the analytics firm. energetic Vortexa show this week.

European diesel imports from Russia hit an abnormally high 680,000 bpd in July, up 13% month-on-month and 22% year-on-year, and topping non-Russian supplies of around 200,000 bpd, according to Vortexa data.

Related: Energy bills set to skyrocket in the UK

“All in all, it seems doubtful that the Europeans will be able to fully implement the announced diesel import ban, given the record high diesel prices already in the past five months, Europe’s growing reliance on diesel Russia, limitations within the global refining system and the likely important role of diesel as an alternative fuel to natural gas and power shortages.The above will test the resolve of Europe and its politicians in particular,” wrote Vortexa chief economist David Wech.

Going forward, it will be crucial to see whether U.S. refiners – lured by high European margins – produce more diesel for export to Europe, Wech told the FinancialTimes.

According to US refiners, there is not much room for a further increase in diesel shipments from America to Europe.

Gary Simmons, executive vice president and chief commercial officer of Valero Energy, said in the second quarter earnings call last week that “It will be a real challenge for us to be able to supply a lot more diesel in Europe.”

With US inventories low and “the industry pretty much sold out,” “it’s very hard for me to see there will be a lot of flow from the US to Europe,” Simmons added.

Fuel supply across Europe is even more disturbed by extremely low water levels on the Rhine, an important transport corridor for petroleum products. OMV’s German unit told Bloomberg that it is “observing a current run on fuel oil and diesel.”

Even if economies slow, the switch from gas to oil in Europe as the winter heating season approaches should support demand for distillate fuel and potentially further tighten the diesel market.

By Tsvetana Paraskova for Oilprice.com

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