Viewpoint: Europe diesel supply set to outshrink demand
Europe enters 2023 with demand for diesel waning as high energy prices and rampant inflation take their toll on the region's economic growth prospects. But the drop in consumption is likely to be outpaced by constraints on supply as Russian imports dry up, supporting European diesel margins in the first quarter of the year.
The EU's ban on Russian oil product imports takes effect on 5 February. More than half of the diesel and gasoil arriving in Europe by sea in 2022 has come from Russia, according to Vortexa. That means around a tenth of regional demand has been met with Russian product. Although the upcoming ban was announced in the summer, there has been no gradual phase-out. In fact, Europe took more diesel and gasoil from Russia in November 2022 than it did a year earlier.
Europe got a taste of a diesel supply shock in October when strike action shut down all but one of France's refineries, accounting for around 5pc of the region's total refining capacity. Argus estimates the closures took roughly 30,000 t/d of diesel supply out of the European market. Traders responded by importing more from locations east of Suez. But they had to pay premiums of more than $200/t over Singapore diesel prices for these imports at one point, pushing European diesel prices to a record $77/bl premium over crude in mid-October.
Europe's diesel market is vulnerable to supply shocks because stocks are at historic lows. Refining costs have soared since late 2021 as natural gas prices rose, emissions allowances grew more expensive, capacity was cut from the European refining system and high inflation led workers to demand bigger pay increases. This has incentivised traders to use stored diesel to meet marginal demand. But that is not sustainable. In September Dutch diesel inventories were at their lowest in at least eight years.
When Europe stops importing diesel from Russia, the region will lose around 60,000 t/d. All things being equal, the restriction on supply will be considerably more severe than it was during the French strikes in October. And while the industrial action was resolved in a matter of weeks, the ban on Russian diesel looks set to stay in place for much longer than that, barring an end to the conflict in Ukraine.
Of course, all things will not be exactly equal. Europe is edging steadily into recession, with manufacturing purchasing managers' indices pointing to contraction since the summer. Inflation has been running at more than 10pc annually, prompting central banks to ratchet up interest rates to try to cool economic activity. All of this will depress diesel demand and already seems to be doing so, at least in the UK and Germany.
During the Great Recession of 2008-09, diesel demand fell by around 10pc in some European countries, equivalent to the proportion of European diesel supply that currently comes from Russia. But in the unlikely case of such an economic downturn, demand for other oil products would also drop and refineries would be forced into heavy run cuts. That would mean a reduction in local diesel production at the same time as the halt to Russian imports, so supply could still fall short of demand even in the case of a severe recession.
Diesel premiums over crude have come down a long way since their peak during the French strikes. They spent most of November around $45/bl before dipping briefly below $40/bl. But two factors are pushing diesel margins higher again as 2022 draws to a close. Natural gas prices are on the rise as temperatures drop. And European gasoline prices are flirting with discounts against crude because of seasonally low demand, effectively adding losses on gasoline to the costs of producing diesel. These factors will support regional diesel prices in January, even before the embargo on Russian products comes into play. Any effort to rebuild stocks will be costly and will itself put upward pressure on diesel prices in the short term.
Related news posts
General Petroleum expands UAE base oil storage facility
General Petroleum expands UAE base oil storage facility
Singapore, 7 May (Argus) — UAE-based lubricant producer General Petroleum plans to finish building the second phase of its UAE base oil storage terminal by the end of May, according to a source close to the firm. The construction started in March and will consist of 12 storage tanks, each with a 2,200t capacity. The producer aims to start operations at the second phase in June. Construction for a third phase is also scheduled to begin in June 2025, which will add four storage tanks of 6,000t capacity each. The first phase of the storage terminal started operations in March 2020 . That storage terminal consisted of eight storage tanks, each with a 1,550t capacity. The facility, located in the Hamriyah free zone in Sharjah, is expected to have a combined 62,800t base oil storage capacity after the phase three expansion is complete. The terminal is connected by two pipelines to the jetty. General Petroleum operates a 150,000 t/yr lubricant plant opposite the storage terminal, and exports more than a third of its production to overseas markets, the same source added. The company had highlighted North Africa, Asia-Pacific, and the Americas as key markets for growth. The blender also has a 25,000 t/yr production facility in Tanzania and a 35,000 t/yr facility in Uganda. The UAE is a major lubricant blending and trading hub in the region because of its strategic location and logistics infrastructure. The Mideast Gulf is also largely self-sufficient on base oil supply and is typically a net exporter of the lubricant feedstock, especially for Group I and Group III supplies. Regional base oil supply is set to rise in the years ahead with planned expansions. Africa is a growing market for base oils, propelled by its gross domestic product and population growth. Rising mobility needs and vehicle ownership is also expected to boost demand in the years ahead. Africa predominantly produces Group I base oils but remains structurally short on supply. Overseas supplies, including those from the Mideast Gulf, make up a sizeable portion of the region's imports. By Chng Li Li Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
Brazil unlocks relief spending to flooded state
Brazil unlocks relief spending to flooded state
Sao Paulo, 6 May (Argus) — Brazil's president Luiz Inacio Lula da Silva signed a decree to ease relief spending to Rio Grande do Sul state, which has been hit with historically heavy rainfall and floods. "We are going to do everything in our power to contribute to Rio Grande do Sul's recovery," he said today after signing the decree, adding that was only the first of "a large number of acts" for the state. The decree recognizes the state of emergency in Rio Grande do Sul and allows the federal government to grant funding and tax waivers to the state without having to comply with spending limits. In addition, it makes rules for public authorities to contract services and purchase products more flexible. The decree still needs both senate and congressional approval — which should be hasty, as both the senate and house leaders were present at the decree's signing. It is still not clear how much money it will take to rebuild the state, chief of staff Rui Costa and planning minister Simone Tebet said. But the minister of regional integration Waldez Goez estimated that it will take around R1bn ($200mn) to rebuild the state's highways. Rio Grande do Sul has been hit with heavy rainfall since 29 April. The highest volumes reached the central areas of Rio Grande do Sul, with cities receiving rainfall of 150-500mm (6-20 inches), regional rural agency Emater-RS data show. The monitoring station of Restinga Seca city, in the center of the state, recorded rainfall of about 540mm. Rainfall in Rio Grande do Sul overall surpassed 135mm in most of the state, according to the US National Oceanic and Atmospheric Administration (NOAA). State capital Porto Alegre is expected to receive more rain later this week, according to Rio Grande do Sul-based weather forecaster MetSul. MetSul warned that parts of the Porto Alegre metropolitan area could remain uninhabitable for weeks or months. The floods have left at least 83 dead and 111 missing, according to the state government. An additional 130,000 people have been displaced from their homes. By Lucas Parolin Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
ANP reduz mescla de etanol e biodiesel no RS
ANP reduz mescla de etanol e biodiesel no RS
Sao Paulo, 6 May (Argus) — A Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP) diminuiu, temporariamente, a mistura obrigatória de etanol e biodiesel no Rio Grande do Sul por 30 dias, a partir de 3 de maio, em meio a enchentes catastróficas no estado. O mix de etanol anidro na gasolina caiu dos atuais 27pc para 21pc, enquanto o do biodiesel no diesel S10 está agora em 2pc, queda em relação à porcentagem vigente de 14pc. Também de forma temporária, a agência suspendeu a necessidade de mistura para o diesel S500. A ANP informou que pode revisar os prazos da medida dependendo das condições de abastecimento no estado. As chuvas no Rio Grande do Sul bloquearam rodovias e ferrovias que transportam os biocombustíveis para centros de distribuição, como Esteio e Canoas. O fornecimento de combustíveis fósseis pela ligação dutoviária da refinaria Alberto Pasqualini (Refap) às outras bases de distribuição do entorno não foi comprometido, afirmou a ANP. As enchentes no estado já deixaram pelo menos 83 mortos e 111 desaparecidos, de acordo com o governo local. Mais de 23.000 pessoas tiveram que deixar suas casas e cerca de 330 cidades estão em situação de calamidade pública. Por Laura Guedes Envie comentários e solicite mais informações em feedback@argusmedia.com Copyright © 2024. Argus Media group . Todos os direitos reservados.
Brazil lowers biofuel mix in flooded state
Brazil lowers biofuel mix in flooded state
Sao Paulo, 6 May (Argus) — Brazil's oil regulator ANP temporarily decreased the mandatory mix of ethanol and biodiesel in fuels in Rio Grande do Sul state for 30 days, starting on 3 May, amid floods in the region. The anhydrous ethanol blend on gasoline was lowered to 21pc from the current 27pc, while the mandatory biodiesel mix for 10ppm (S10) diesel is now at 2pc, down from the usual 14pc. The agency also temporarily suspended the blending mandate for diesel with 500ppm of sulfur (S500). ANP said it can revise deadlines depending on supply conditions in the state. Rainfall in Rio Grande do Sul blocked railways and highways where biofuels are transported to retail hubs, such as Esteio and Canoas. Supply of fossil fuels via pipeline from the 201,000 b/d Alberto Pasqualini refinery (Refap), in Canoas, and other retail bases has not been compromised, ANP said. Floods in Rio Grande do Sul have left at least 83 dead and 111 missing, according to the state government. More than 23,000 people have been forced from of their homes amid widespread damage. Over 330 cities are in a situation of public calamity. By Laura Guedes Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
Business intelligence reports
Get concise, trustworthy and unbiased analysis of the latest trends and developments in oil and energy markets. These reports are specially created for decision makers who don’t have time to track markets day-by-day, minute-by-minute.
Learn more