Rowena Edwards and Bozorgmehr Sharafedin

LONDON, (Reuters) – European countries face the possibility of a shortage in diesel. The preferred fuel for heavy industries, it is threatened by sanctions against Russia that could disrupt imports, while supplies from other sources remain limited.

Russia is Europe’s largest supplier of diesel and related fuels, sending over three quarters of a million barrels per day for use in European heavy machinery, transportation, farming, fishing and for power and heating.

    The surge in diesel prices in Europe has already had an impact on industry by pushing up fuel and transportation costs, which are passed on to consumers through higher costs across the economy.

    “Governments have a very clear understanding that there is a clear link between diesel and GDP, because almost everything that goes into and out of a factory goes using diesel,” John Cooper director general of Fuels Europe, a division of the European Petroleum Refiners Association.

In response to Russia’s invasion, the United States banned Russian oil imports. Britain announced that it would phase out Russian oil and products imports by 2022. The European Union has also been considering a ban.

    Meanwhile, several oil companies have pulled back from buying from Russia because of a fear of public opposition, difficulties in securing financing, insurance and a reluctance of ship owners to load from Russian ports.   

    Around 760,000 barrels per day of Russian gasoil and diesel flows to Europe would be at risk, needing replacement, if European buyers shun these volumes, according to energy consultancy FGE.

    It will be difficult for European refiners to increase output of middle distillates, which include diesel and , Cooper said, so Europe should find other sources of diesel, probably at higher prices.

   MOST EXPOSED COUNTRIES

   Russia accounts for around half of Europe’s diesel imports, Russell Hardy and Torbjorn Tornqvist, chief executives of Vitol and Gunvor respectively, told the FT Commodities Global Summit on Tuesday.

    Saudi Arabia, the second biggest supplier, accounted for only 12% of the imports in 2021, according to FGE.

    France imported 25 million tonnes of diesel in 2020, a quarter of which was Russian, according to the French Association of Petroleum Industry (UFIP).  

France could have difficulty finding other supplies.

“We estimate that 10 to 15% can be found elsewhere,” Olivier Gantois, the head of UFIP, said this month.

    In the United Kingdom, Russia supplied 18% of the diesel in 2020, official figures show.

    A spokesperson for UK Petroleum Industry Association (UKPIA) told Reuters fuel suppliers are working with the government to deliver the fuels the UK needs “while adjusting long-term supply routes to reduce reliance on Russian and oil products”.

    For Germany the situation seems to be more complicated as it has fewer options to reduce its deep reliance on Russian diesel, according to trading sources.

    Germany relied on Russia for almost 30% of its diesel and gasoil imports in 2020, data from the EU statistics agency show.

    Despite the decision by several companies to self sanction, the flow of Russian refined products continues into Germany, according to trading and industrial sources, and it is expected to stay the same in the absence of alternative supplies.

    “There just isn’t enough diesel around not to take [Russian diesel]”At the moment,” said a source in trading.

    “We see some people prefer non-Russian oil, but if there is no alternative, then they will take it,” the source added.

    GLOBAL DIESEL SHORTAGE

    Global stocks of diesel and other middle distillates have fallen to the lowest seasonal level since 2008 due to refinery shutdowns during the start of the pandemic and a rise in demand since.

    Unlike Europe, which is short of diesel, the Middle East usually has a surplus due to higher refinery runs, with yields largely in favour of diesel.

According to FGE, the net surplus will rise to 1.33million bpd in this year. However, many Middle Eastern products do not meet European market standards for low levels of pollution. Middle Eastern producers export products all over the world.

    A more likely source of replacement barrels for Europe is the United States, which will have a net surplus of 1.1 million bpd this year, according to FGE.

    But increasing flows to Europe from the Middle East and the United States will take time, one trader said, adding that for this reason “for now things will have to stay the same”.

    Furthermore, increased diesel trade flows between the United States and Europe could have knock-on effects elsewhere.

    As European countries have more cash at their disposal, they could outbid Latin American countries, creating a shortage in Latin America, FGE analysts said.

    “The diesel market is extremely tight and we’re possibly heading to stock outs. Europe could probably afford to pay. It’s what will happen to Africa or Latin America that is the problem,” Trafigura CEO Jeremy Weir explained on Tuesday.

    “We’re very concerned about the stock outs due to take place in Africa that heavily rely on diesel for power generation,” Weir added.

    HIGH PRICES

    The high diesel prices could also reduce demand among private car owners who account for consumption of 1 million bpd in Europe.

    “Average diesel prices at the pumps in Europe are now more expensive than gasoline. It is the first such time in human history. “If oil prices rise, private diesel car drivers could be forced to drive less,” stated Cuneyt Kazokoglu of FGE, who is responsible for analysis on oil demand.   

Analysts said that with limited supply, price has risen to the point where it reduces demand. However, forecasts of these levels remain uncertain.

But signs of destruction in the demand are already evident.

Barrie deas, chief executive officer of the UK’s National Federation of Fishermen’s Organisations told Reuters that fuel prices are extremely volatile and some fishing boats may find it difficult to take off on a trip.

Because of disruptions in Black Sea fertiliser and grain exports, higher fuel prices are also causing problems for food supply chains.