German diesel stockpiles are steadily sinking and the gap they are leaving will be expensive to fill.
Traders in Germany expect prices to rise as stockpiles are used up, even if demand remains at its present low level. Stockpiles have been steadily declining since the EU banned Russian diesel on 5 February. Enough remains that some importers can postpone buying fresh cargoes, although they acknowledge their hand will be forced at some point.
The return to the spot market is already beginning, as shown by a moderate increase in cargo arrivals in March. Non-Russian sellers looking to move cargoes into Germany said some buyers started proactively to seek cargoes during the past month. There had been very little interest in January, because the market was flooded with cheap Russian product, and only a little more in February.
Diesel and gasoil arrivals at Germany's northern ports fell to just 180,000t in February, only a fifth of the January volume, Vortexa data shows. The volume bounced back to 450,000t in March, but that remains well short of the 600,000t monthly average in 2022. Traders said there is still some Russian-origin diesel in German storage, acquired at discounts before it became illegal to import. Last year, 70pc of the arrivals came from Russia. In March, the main sources were the Middle East and Scandinavia.
As German buyers return to the international spot market, they are finding that sanctions have changed it profoundly. Cargoes delivered to German ports now tend to be more expensive than those delivered to Amsterdam-Rotterdam-Antwerp (ARA) or northern France, because the latter can process relatively cheap Long Range 2 (LR2) cargoes from east of Suez that now dominate inflows to the region. Germany has one port — Wilhelmshaven — capable of receiving LR2s fully loaded with diesel, but its inland infrastructure is so limited that this diesel mainly needs to be reloaded onto smaller ships to go to other ports.
Traders said Germany now finds itself, with Poland, at the back of the geographical queue for Europe's new diesel imports, facing higher freight costs than their competitors around northwest Europe, whereas they used to be at the front. They are well-placed to import from Nordic suppliers such as Finland's Neste and are doing so, but this volume only meets a fraction of German import demand and is structurally limited since Finland and Norway have both permanently closed down refineries in the past few years.
Traders said diesel importers have fewer term contracts in place this year, since the old Russian ones could not be renewed. Now that a greater proportion of demand needs to be met through spot purchases, spot prices may prove more sensitive than before to demand and stock levels.
Seasonal refinery maintenance is in progress too, accelerating the depletion of German stockpiles. Bayernoil's 207,000 b/d refinery in Bavaria has extended a partial shutdown until the end of April and Gunvor's 100,000 b/d Ingolstadt refinery is also under maintenance. PCK's 226,000 b/d Schwedt refinery and BP's 94,000 b/d Lingen refinery will both start maintenance work in April.
Some German importers were encouraged to postpone purchases in the middle of March as the French strikes appeared to lift prompt diesel values. Significant volumes may be moving from Germany into France overland — 120,000t did so in October when strikes previously immobilised French refining. But traders said the current round of French strikes has tended to add to supply in the wider market in the short term by obstructing shipments into France. If French buyers return urgently to the international spot market when strikes allow them, and German buyers need to replenish their own tanks at the same time, international supply could be stretched.
The diesel premium against North Sea Dated crude rose by nearly $10/bl month on month to peak at $35.12/bl on 17 March. But by 30 March it had given back almost all of those gains, even though French refining activity became more severely disrupted.
