Column: Global diesel shortage drives up oil prices

An employee holds a diesel fuel nozzle at a gas station in Nice, France, October 13, 2021. REUTERS/Eric Gaillard

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LONDON, March 24 (Reuters) – Worsening diesel shortages in the United States and the rest of the world are intensifying upward pressure on oil prices and threaten to recreate the conditions that led to record price rises in 2008.

US inventories of distillate fuel oil, the category that includes diesel, fell by 2 million barrels to 112 million barrels last week, according to high-frequency data from the US Energy Information Administration. (EIA).

Distillate stocks have declined in 52 of the last 79 weeks by a total of 67 million barrels, and are at the lowest level for the time of year since 2014 and prior to 2008 (“Weekly Oil Status Report” , EIA, March 23).

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Distillates have become the tightest part of the oil market: US inventories are 20% below the pre-pandemic five-year average for 2015-2019 compared to 11% shortfalls in crude and 1% in gasoline.

If inventories move according to seasonal patterns over the past ten years, inventories are expected to fall to a low of 104 million barrels before mid-year, which would make them as tight as they were in 2008.

However, in a reasonable worst case, stocks could be depleted to as little as 93 million barrels, which would be critically low and lead to explosive upward pressure on prices.

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WORLD DEFICIT

A similar shortage of distillates has emerged in Europe and Asia as the rapid recovery in consumption after the pandemic has outpaced the surge in crude oil output and diesel output at refineries.

By the end of February, Europe’s distillate stocks had already fallen to the lowest seasonal level since 2008. Singapore’s stocks are currently at the lowest seasonal level since 2006.

Middle distillates, such as diesel and gas oil, are used primarily in freight transportation, manufacturing, agriculture, mining, and oil and gas extraction, making them the most cycle-sensitive part of the industry. oil company

Synchronized global expansion in North America, Europe and Asia has created acute shortages as it did in 2007/2008.

Consequently, distillate prices are driving the entire oil market higher, with upward pressure on diesel prices spilling over into the adjacent gasoline market and the upstream crude market.

In the United States, the average price of diesel on the highway has increased 61% over the past year compared to a 47% increase in gasoline prices, according to the EIA.

In 2008, distillate shortages helped push crude to an inflation-adjusted peak of more than $187 a barrel mid-year, after distillate stocks hit abnormal seasonal lows a few months earlier.

INVASION OF UKRAINE

A similar scenario appears to have been playing out this year. But the Russian invasion of Ukraine and the sanctions imposed in response threaten to further aggravate the distillate shortage.

Russia is a major exporter of middle distillates, as well as distillate-rich crude oil and residual fuel oil, mainly to countries in Europe.

Russia accounted for 29% of Europe’s imported crude oil and 39% of its imported products in 2020, according to BP (“Statistical review of world energy”, BP, 2021).

The Russian invasion of Ukraine and the escalation of sanctions pose a growing threat to these distillates and other oil flows.

Futures markets have anticipated a potential disruption by driving distillate prices to a huge premium over crude.

European first-month diesel futures prices are trading at a premium of $46 a barrel to Brent, down from $15 before the invasion and less than $4 a year ago.

In real terms, current diesel prices of around $167 a barrel are already in the 97th percentile for every month since 1990, though still well below the inflation-adjusted peak of $226 in 2008.

Ultra-high prices are a signal to refiners to maximize crude processing and distillate production, and to consumers to cut diesel use as much as possible to rebuild depleted inventories.

Over the next three months, diesel production must accelerate significantly, consumption growth must slow down, and the market must avoid a significant loss of Russian exports.

If that is not possible, the result is likely to be a sharp increase in prices, which will force a reduction in consumption through a slowdown in the economic cycle.

Related Columns:

– The global shortage of diesel increases the risk of a rise in the price of oil (Reuters, March 11) read more

– US diesel stocks to fall critically to their lowest level (Reuters, February 17) Read more

– World oil inventories are exceptionally tight (Reuters, February 15) read more

– Diesel is the inflationary canary of the US economy (Reuters, February 9) read more

John Kemp is a market analyst for Reuters. The opinions expressed are yours.

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Edited by Jane Merriman

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, according to the Trust Principles, is committed to integrity, independence and freedom from bias.

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