War-driven supply shocks threaten global diesel market ahead of winter

Europe is bracing for a severe winter diesel shortage as conflicts in the Middle East and Ukraine constrain global supplies and drive up prices, threatening significant regional inflation.

Disruptions in the Strait of Hormuz, damage to Arabian Gulf refineries, and Ukrainian strikes on Russian facilities have restricted regions that accounted for a third of global diesel exports last year. Europe is uniquely vulnerable due to its limited domestic refining capacity and heavy reliance on imports.

“Europe is facing a massive problem in diesel. The situation will worsen, as we are likely to see very high prices,” said Eugene Lindell, head of refined products at FGE NexantECA, noting the impending impact on shipping costs, inflation, and political stability.

Diesel price gains are vastly outpacing crude. The global benchmark ICE Futures Europe diesel has surged 40% from its June 18 low, compared with a 5% rise for Brent crude, according to Morgan Stanley. Meanwhile, European inventories have plummeted 30% since late March, falling well below seasonal averages just as buyers typically stockpile for winter.

Bloomberg reported that sanctions further complicate the supply crisis, according to Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security. Restrictions on Russian refined products and stricter European Union sanctions on third-country fuels produced from Russian crude remain in place, while Moscow is considering a diesel export ban to prevent domestic shortages.

Although US refineries shipped record distillate volumes to Europe last week, these flows are expected to drop as American demand rises.

“Gulf Coast refineries cannot continue to export diesel to northwest Europe indefinitely, as they have their own priorities,” said Zamir Youssef, head of clean oil products analytics at Kpler. He noted these refineries typically shift cargoes to the US East Coast by the first quarter to meet winter heating needs.

According to Bloomberg, Asian refineries will similarly prioritise domestic requirements, reducing export availability. They are expected to focus on heating kerosene for countries like Japan, while some regional power generators are increasing diesel consumption to offset liquefied natural gas (LNG) shortages stemming from the Middle East conflict.

Forced to compete with Africa and Latin America for Atlantic basin cargoes, Europe remains the most exposed to these global supply shocks. The market’s ultimate trajectory will hinge on winter temperatures, Chinese export volumes, and global refinery operating rates in the coming weeks.

“We have not fully recovered from the loss of refining capacity in the Middle East, and we have also lost Russian refining capacities,” said Joan Goh, senior oil market analyst at Sparta Commodities. “Europe’s struggle is not an immediate crisis, but a looming one.”

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