The crisis surrounding gas has not yet been averted or there is a threat of a shortage of diesel. The complete ban on oil and oil products from Russia, to come into effect later this year, plays an important role in this. But it is not only the disappearance of diesel from Russia that causes problems. Underlying there is much more going on in the diesel market.
The Russian attack on Ukraine painfully exposes how dependent the EU is on energy from Russia. Gas is one of the most striking energy carriers. Russia not only supplies gas to the EU, but also oil and oil products such as diesel. From December, the EU wants a complete embargo on the import of oil and derivatives from Russia. That plan is not new and several analysts have been warning for months that the complete ban on oil could cause major problems in the EU.
In recent months, (European) government leaders have been particularly busy with emergency plans for the gas supply. Diesel has been the neglected child. That now threatens to come back like a boomerang.
Market is adrift
Russia accounts for approximately half of the diesel that the EU imports. Not all diesel is imported. By far the largest part is distilled within the EU from crude oil, which in turn comes from outside Europe. This effectively means that Russia supplies approximately 15% of the total diesel demand within the EU. If you compare that with gas, of which approximately 40% came from Russia, the dependence on diesel seems to be relatively minor. Unlike natural gas, oil and diesel are relatively widely available and easy to transport from other parts of the world. So far, the loss of diesel from Russia appears to be an annoying and expensive problem, but not one that is insurmountable.
In stock diesel
However, practice appears to be more difficult. Worldwide, demand for diesel has recovered much faster after the corona crisis than experts and oil companies expected. The demand for diesel has increased much faster than the demand for, for example, gasoline and kerosene. Because not only diesel is extracted from crude oil, but also other products that also have to be sold, oil companies have eaten into the supply of diesel.
According to figures published by the EIA last week, the diesel supply in the US is only sufficient for 25 days. That is the lowest inventory since 2008. This low inventory coincides with a peak in demand. The four-week rolling average for oil distillate demand - a key indicator of diesel demand - has risen to the highest level for this period since 2007. European diesel supplies are also relatively tight and are at their lowest level since winter 2011.
High price puts a brake on inventory build-up
The relatively high diesel price ensures large margins on diesel production. CME data shows that US refineries currently have an average margin of $86,50 per barrel on diesel production. From 2000 to 2020, the average margin was $15,70 per barrel. You would expect that that is a huge incentive to produce more diesel. The other side of the coin, however, is that building up inventories becomes expensive. Supplying diesel directly yields more money than producing it for storage for later delivery. If the refinery can capture just under $10 per barrel more for diesel for immediate delivery than for delivery in December, it is not interesting to build up inventory. The market is therefore in a dangerous spiral of small stocks and high prices that maintain each other.
Due to the high diesel price in the US, two ships with a total of 1 million barrels of diesel on board have changed course from the EU to the US. That is quite exceptional. Normally the US is a net exporter of diesel to the EU. A scenario similar to LNG, where European countries bid against Asian countries, is now also looming for diesel. The European diesel market has suffered an additional blow in recent weeks due to the strike at the French refineries of TotalEnergies. Employees have been on strike for more wages for approximately three weeks. This caused shortages at the pump in France and did nothing but contribute to stockpiling in the EU.
Emergency stock
Due to the gas crisis, some industries have invested in alternative fuels including diesel. The parties are very secretive about it, but between the lines it can be seen that various energy-intensive sectors that can exchange gas for oil in their production processes have taken measures to do so in recent months. In short: they have the materials to convert installations and machines from gas to diesel and have built up a stock of diesel. If the gas shortage turns out not to be too bad, the stock of diesel may provide some breathing space for the European market. But as said, companies are shady about this, making it difficult to determine whether and to what extent this effect will occur.
Jetten is working on an oil emergency plan
In the Netherlands, Minister Jetten is working on an emergency plan, the National Oil Crisis Plan. A detailed plan such as for natural gas, with measures to prevent a shortage and which sectors will be given priority if insufficient supplies cannot be provided, does not yet exist for oil and/or diesel. And while diesel also plays a dominant role. Sectors such as agriculture, logistics and construction are largely dependent on diesel for business operations.