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Diesel, along with other distillate fuels such as heating oil
and gasoil, are the lifeblood of industry with uses ranging from
powering factories to heating homes, in addition to being used
as a motor fuel.
When Russia, which supplies Europe with about 60% of its import
requirement, invaded Ukraine on Feb. 24, the diesel market went
into shock as it priced in a possible cutoff of those supplies.
The six-month spread in European diesel futures went into a
record backwardation of nearly $600 a tonne.
In a backwardated market, current prices trade at a premium to
prices for future deliveries, which makes it uneconomical for
traders to put diesel into storage and book a profit.
"No one in their right mind would put diesel into tanks at those
levels," one European trader said.
GRAPHIC: European diesel futures 6-month spread (https://graphics.reuters.com/OIL-DIESEL/gkvlgodylpb/chart.png)
The result has been that European distillate stocks held by
refiners are trending much lower than their historical averages.
GRAPHIC: European refinery distillate stocks (https://graphics.reuters.com/OIL-DIESEL/klpykwdwepg/chart.png)
Stocks of diesel and gasoil in commercial sites in the
Amsterdam-Rotterdam-Antwerp (ARA) hub are also well below their
historical average, data from Dutch consultancy Insights Global
shows.
GRAPHIC:ARA Gasoil/Diesel Stocks (https://graphics.reuters.com/OIL-DIESEL/zjpqkbnzapx/chart.png)
The spread currently stands at about $100 a tonne, still well
above levels for this time of year.
Compounding the situation further, extremely hot and dry weather
in Europe has led to unseasonably low water levels on the Rhine
river, a key waterway for moving barges carrying fuel from the
massive oil refineries and tank farms in ARA to Germany, France
and Switzerland.
Water levels at the gauge point of Kaub in Germany currently
stand at 42 cm, and Germany's electronic waterway information
service for inland shipping, or ELWIS, forecasts levels to drop
further to 34 cm in the coming days.
GRAPHIC:Rhine levels at Kaub Rhine levels at Kaub (https://graphics.reuters.com/OIL-RHINE/gdpzyomjwvw/chart.png)
According to consultants FGE Energy, 240,000 barrels per day
(bpd) of oil products traversed the Rhine to be unloaded in
Germany in 2021, more than 10% of the country's oil demand.
At current levels, barge owners are opting to load their vessels
at about a quarter or less of their 2,000-3,000 tonne capacity
to avoid grounding into the riverbed.
This has created major bottlenecks along the route and has
raised barge freight rates in some areas to record highs.
While oil products also move through pipeline and by rail into
Germany, those are already operating at full capacity, FGE says.
Trucking is an option, but high fuel costs make this option
uneconomical, they added.
GRAPHIC:German gasoil and diesel stocks (https://graphics.reuters.com/OIL-GERMANY/byprjykydpe/chart.png)
"With the river levels so low there's no point in having product
in ARA as you can't move it down the Rhine, and backwardation is
discouraging having product in tank," one European trader said.
"A major disruption to an important gasoil/diesel supply route
from ARA to inland Europe could not come at a worse time," FGE
said.
The market is already tight due to refinery outages in Austria,
which along with Germany and Switzerland will be looking to
build heating oil stocks ahead of winter.
Soaring natural gas prices which are encouraging a switch to oil
products for power generation could also tighten the market
further, FGE said.
The International Energy Agency on Thursday raised its forecast
for oil demand growth for this year by 380,000 bpd to 2.1
million bpd citing the gas-to-oil switch.
SANCTION DISRUPTION
The European Union will stop buying all seaborne Russian crude
oil from early December and will ban all Russian refined
products two months later.
Europe continues to rely heavily on Russia to satisfy its diesel
demand, with 60% of Europe's seaborne diesel imports originating
from the country in July, according to data from Energy
analytics firm Vortexa.
And with no evidence that companies are stockbuilding ahead of
sanctions, traders expect Europe to be in for a winter shock.
"Who knows what is going to happen back end of this year early
next, looks like it will be carnage for a bit," another European
trader said.
In July, the EU tweaked the sanctions to allow some EU firms to
move Russian barrels to third countries in an attempt to limit
the risks to global energy security, giving traders some leeway
to re-route diesel from other regions to compensate for loss of
Russian barrels.
"As such the market is less concerned about current low stock
levels and assumes these inventories can more easily be
replenished over the coming quarters," said Neil Crosby, senior
analyst at oil analytics firm OilX.
(Additional reporting by Shadia Nasralla; Editing by Veronica
Brown and David Evans)
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