While the OPEC+ deal on crude oil production cuts and the U.S. reaction grab the headlines, a much more immediate crisis is deepening by the day.
Global stocks of diesel and other distillate fuels have been falling for some time now, and there is no reversal of that trend in sight. Demand, on the other hand, has increased, resulting in a growing shortage.
The situation has become so serious that US buyers have started to seize diesel shipments originally sailing to Europe.
Reuters reported earlier this month that at least three tankers carrying diesel from the Middle East changed course mid-stream and were now heading for the United States. And this new competition is about to intensify.
The basis of the shortage is the gap between refining capacity and fuel demand. The pandemic has seen the closure of many refineries, particularly in the United States. It wasn’t just the pandemic itself – the anticipation of a boom in demand for electric vehicles that would render much refining capacity obsolete also had a part to play, as John Kemp of Reuters Noted in a column last week.
However, this boom has yet to materialize. In the meantime, fuel demand remains robust, resulting in a shortage. In Europe, there have been contributing factors, such as the strike by French refinery workers, which made the shortage worse than it otherwise would have been, and planned refinery closures for maintenance
Europe is currently buying a lot of Russian diesel to fill the void, but this will have to stop next February with the entry into force of the Russian fuel embargo, further aggravating an already complicated situation with the supply of distillates. means in a large consuming region.
Argus reported this week that Europe is experiencing a major diesel supply shock due to low inventories and strong demand. And the level of stocks has a lot to do with unplanned outages at European refineries ahead of the maintenance season, including the four-week drop in French fuel production amid the workers’ strike.
On top of that, the article quotes traders saying that there has been little incentive to stockpile diesel in the current market situation: diesel is heavily downgraded at the moment, so from the perspective of refiners and commodity traders, it makes no sense to stockpile.
Related: OPEC+ Insists Its Production Cut Wasn’t Political
In the United States, meanwhile, distillate inventories fell to 106 million barrels, the lowest since records for such inventories began in 1982, Reuters’ Kemp reported. Europe is doing a little better, with distillate stocks at 360 million barrels at the end of September, the lowest seasonal level since 2007.
The United States exported a lot of diesel to struggling Europe, but now things are changing, and not just because cargoes are being diverted from Europe to the American coast. Refiners in the United States are bracing for a possible fuel export ban.
Presented earlier this year by the White House, the idea of banning fuel exports to secure local market supplies prompted the CEO of the American Petroleum Institute and the head of the US fuel and petrochemical manufacturers to warn against such a move.
An export ban could “lower inventory levels, reduce domestic refining capacity, put upward pressure on consumer fuel prices, and alienate U.S. wartime allies,” said Mike Sommers of the API and Chet Thompson of the AFPM. wrote to Energy Secretary Jennifer Granholm.
Yet right now, US buyers are grabbing diesel shipments from Europe in a similar way to how Europe is grabbing LNG shipments originally destined for Asian destinations. And the supply is not growing fast enough because there is not enough refining capacity for it to grow fast enough or even significantly enough. And that means a lot more problems for Europe and the United States, especially in the area of inflation.
By Irina Slav for Oilprice.com
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