By Rowena Edwards

LONDON (Reuters] – Diesel supplies worldwide are dwindling due to refiners’ inability to cope with the rapid recovery of post-pandemic demand. This has led to an increase in global energy scarcity, which already saw prices rise for coal, gas, and other commodities.

In a moment when central banks around the world are worried about rising inflation rates, diesel shortages will push fuel and transportation prices higher and put more pressure on retail prices.

Due to increased domestic demand for road fuel and manufacturing, U.S. diesel imports are now less important than they were in the past weeks.

Gasoil inventories, which include diesel and , held in independent storage in Europe’s Amsterdam-Rotterdam-Antwerp (ARA) refining and storage area fell last week by 2.5%, data from Dutch consultancy Insights Global showed.

Regional stocks were at their lowest level for this time of year since 2008, according to the data, while Singapore’s onshore inventories of middle distillates also sank to multi-year lows of 8.21 million barrels.

Lars van Wageningen from InsightsGlobal stated that while diesel demand is improving in the region (northwest Europe), but there are lower refining capabilities than pre-COVID, and high import levels which keep the market under serious pressure.

On Monday, diesel cargo prices in Northwest Europe reached $114/bbl, their highest price since September 2014 and crude oil margins were at two-year highs.

Morgan Stanley (NYSE:) Analysts note that diesel prices hit $180 per barrel in 2008. This was driven by a tighter middle distillate marketplace, which rose nearly $150/bbl.

They stated that although it’s unlikely that the same thing will happen again, they noted that diesel prices had been closely following the period 2007-08 in recent months.

Last week, a winter storm tested fuel availability in the U.S. with some utilities preparing to use more distillate fuel oil to meet demand, while South Korea and India have been unable to fill a supply gap left by China’s recent clampdown on refined product exports due to their own domestic needs.

The tight supply of Asian diesel has driven Asian diesel prices at 10ppm for their benchmark gasoil to its highest levels since Sept. 2014.

Graphic: European diesel refining margins – https://graphics.reuters.com/EUROPEAN-DIESEL/gdpzynjmkvw/chart.png

In general, refiners react to low inventories and high margins by increasing their production. However, global oil refining is in trouble. Capacity fell last year for the first ever time in 30+ years, as new closures outweighed existing ones, according to the International Energy Agency.

A faster crude processing rate at refineries would allow for higher diesel output. The downstream equipment will be designed to maximize middle distillate yields, at the cost of low ones.

Instead, a number of refineries – particularly in the U.S. – are still running plants at rates below the five-year average to avoid producing too much jet fuel, where demand still lags 2019 levels, leaving companies struggling to identify a clear way to restock diesel inventories in the short term.

“Given the pressure from investors to reduce investments in fossil fuels and talk of peak oil demand, this backdrop likely reduces the incentive to invest in new refining capacity,” UBS analyst Giovanni Staunovo said.

“With fuel demand likely to increase in the next 10–15 years, and supply unable to keep pace, I would expect more (fuel price) volatility in the future,” he added.

LEANING BACK

The tightening European supply pressures pushed Monday’s region’s diesel price to over $100 per tonne, the largest backwardation ever recorded.

Backwardation is when prompt prices are greater than future contract price. This is a sign that traders feel the need to move oil out of storage in order to make it more profitable.

Graphic: European diesel backwardation blows out – https://graphics.reuters.com/EUROPEAN-DIESEL/klvykmjnwvg/chart.png

According to Refinitiv data and down from the 1.83 million tones that were expected in January, these preliminary diesel and fuel oil flows into Europe via east of Suez from Russia, Russia and the Baltics are now at 1.66million tonnes.

“We have seen minimal diesel exporting from the U.S. Gulf Coast, and zero storage plays on clean vessels,” said one U.S. clean tanker broker.