Europe may face a serious diesel fuel shortage this winter due to the simultaneous impact of the war in the Middle East, damage to refining capacity in the Persian Gulf, and Ukrainian strikes on Russian refineries. Bloomberg reports this, writes UNN.
The situation on the global diesel market has already deteriorated significantly. Supply disruptions through the Strait of Hormuz and damage to refineries in the Persian Gulf countries, as well as Ukraine's strikes on Russian oil infrastructure, have limited exports from regions that last year accounted for about one-third of global diesel fuel supplies, the publication writes.
Europe is the most vulnerable
The greatest risks currently concern Europe, as the region has insufficient domestic oil-refining capacity and is heavily dependent on diesel imports.
Europe has a huge problem with diesel. The situation will become very difficult, and we will likely see extremely high prices. This will affect transportation costs and inflation and create additional political pressure on governments
According to him, the consequences of the shortage may not become apparent immediately, but the situation will worsen as winter approaches.
Diesel prices are already rising faster than oil prices
"Supply problems are already reflected in prices. The European diesel futures contract, one of the global benchmarks for the market, has risen by almost 40% from its low on June 18. For comparison, the price of Brent crude rose by approximately 5% over the same period," the article says.
Bloomberg notes that diesel is particularly important to the economy because it is used not only in road transport but also in industry, construction, and heating systems. Therefore, higher fuel prices could intensify inflationary pressure even if the price of oil itself remains relatively stable.
At the same time, diesel stocks in key importing regions are declining. The largest drop was recorded in Europe – approximately 30% since the end of March. Stocks have also fallen well below seasonal averages.
Strikes on Russian refineries add to the problems
One of the factors worsening the situation is the reduction in Russia's refining capacity. Ukrainian strikes on refineries and other oil infrastructure are reducing Russia's ability to produce and export petroleum products, the publication writes.
At the same time, Europe continues to operate under sanctions restricting Russian petroleum products. According to Rachel Ziemba, a senior fellow at the Center for a New American Security, restrictions on imports of Russian petroleum products remain in force, while new EU sanctions are increasingly complicating the purchase of fuel produced from Russian oil in third countries.
Thus, Europe is simultaneously facing a reduction in available supply and restrictions affecting some potential suppliers.
The US and Asia will not be able to supply Europe with diesel indefinitely
US refineries are currently providing some support to the European market. Last week, the United States exported a record volume of distillates, most of which was diesel, and a significant portion of these supplies went to Europe.
However, Bloomberg warns that this situation is unlikely to last long. As winter approaches, US refineries will have to meet domestic demand, particularly for heating.
"Refineries on the Gulf Coast cannot export diesel to Northwest Europe indefinitely. They also need to supply their own market," said Zamir Yousuf, head of clean petroleum products analysis at Kpler.
A similar problem is emerging in Asia. Because of the war in the Middle East, some Asian power plants that are experiencing difficulty accessing liquefied natural gas may increase their use of diesel fuel.
At the same time, Asian refineries themselves will need more fuel ahead of the winter period.
Some facilities may also switch to producing kerosene, which is used for heating, further reducing the volumes of diesel available for export.
The worst could be yet to come in winter
According to Bloomberg, the ultimate scale of the problem will depend on winter temperatures, the operating rates of refineries worldwide, and the volumes of diesel exports from China.
However, analysts already expect Europe to enter the cold season with much lower fuel stocks than usual.
"We have still not been able to fully compensate for the loss of refining capacity in the Middle East, and now we have also lost some Russian capacity. Europe's diesel problem is not an immediate crisis, but a problem that will unfold further," said June Goh, a senior oil market analyst at Sparta Commodities.