The EU sanctions on track to ban Russian oil from this winter onward will impact diesel more than anything else. Prices are likely to go so high that demand for the fuel gets squashed. That is, if the recession has not already destroyed that demand.
Europe is accustomed to importing more than 2.5mn tonnes of diesel and related products from Russia every month. That is around half of the continent’s diesel imports and it meets around one tenth of its diesel demand. This did not change at all for six months after Russia’s invasion of Ukraine.
In September, it looked as though Russia’s market share was shrinking at last — but the French refinery strikes created a shortage of diesel in Europe in October and imports from Russia surged again.
Despite talk of ‘phasing out’ Russian oil supply by the end of the year, policymakers have done little to smooth the transition. Their hands were tied, because European diesel importers have long-term contracts with Russian suppliers, often covering a whole calendar year. There was no legal way to exit those contracts unless sanctions compelled it. Whenever the sanctions came into force, it would feel like a cliff edge.
Even at the best of times, trying to find an extra 2.5mn tonnes of diesel per month from new suppliers would come at a monumental financial cost. The most feasible places to get it are the Middle East and India, which are the second and third-biggest suppliers of diesel to Europe. But every extra barrel Europe buys has to be won off Asian buyers at incrementally higher cost.
Europe is especially vulnerable to supply disruption in the coming months because it has so little diesel in storage now. High natural gas prices and rising emissions allowance costs have made oil refining far more expensive over the last year, which gave companies an incentive to use what they had stored. After a year of that incentive, the scarcity of reserves is making prices even higher and more volatile than they would be anyway.
In August, a set of 16 major European countries had the least collective middle distillates in storage since 2008, data from European oil data foundation Euroilstock show. Diesel is the most common of the middle distillates. Storage is disproportionately concentrated in the Netherlands. Diesel storage there was around 40pc shorter in August than it had been just one year earlier.
The EU will ban Russian crude oil from December. The continent is less dependent on Russian crude than on Russian diesel, but this is still likely to push up crude prices for refineries in the region. That will be indirectly lifting diesel prices even before Russian diesel is banned from February.
The great uncertainty hanging over diesel is the severity of the recession that is now beginning in Europe. Diesel is the dominant fuel of industrial and commercial vehicles, meaning recession tends to weigh heavily on demand for it. It is already happening: the Eurozone manufacturing purchasing managers’ index (PMI) for October showed the deepest contraction since the start of the Covid-19 pandemic — and a fourth consecutive month of contraction.
The full impact on demand is yet to be seen, but the latest data shows contraction in some countries. UK diesel demand is dropping especially quickly because it has moved faster than any of its European neighbours to cut off trade with Russia and its government has steeply hiked fuel duty for construction firms at the same time. A full 14pc of UK demand for diesel and related products vanished between August and September, government data show. That may be a sign of what is to come for other countries when they too lose the Russian supply line.
Where will Europe get its diesel from? Take a look at our supply/demand balance forecast by region to see how key trade routes could grow.