Analysis | The rally in the oil price is negative. The diesel crisis is much worse –

Winston Churchill spoke of Russia in 1939 as a series of layers: a puzzle shrouded in mystery. Like a matryoshka doll. The 2022 oil market looks a bit like this: the tight commodity market embracing an even more scarce oil supply market puts the diesel market in crisis mode.

The Brent and West Texas Intermediate oil benchmarks typically attract the attention of the financial markets. However, regular consumers – households and businesses – do not purchase raw materials; They buy refined petroleum products such as diesel and gasoline. Many diesels are currently not for sale.

This is a big deal. Diesel is the workforce of the global economy. Absorbs the noise of trucks and vans, excavators and heavy equipment, freight trains and ships. Last week, wholesale and retail diesel prices hit an all-time high, surpassing their 2008 peak.

Average US retail prices jumped to $ 5 per gallon for the first time. In the UK, 70 sells for more than 1.70 liter, which is more than $ 8.5 per gallon. The increase is significant in modern life due to the ubiquity of diesel. As shipping fuel, rising prices will shock everyone, increasing the inflationary pressure that has been at its peak for decades. The sharp rise in the prices of diesel rather than oil should be the main concern of central banks.

The dire state of the diesel supply predates the Russian invasion of Ukraine. Although global oil demand has not yet reached pre-pandemic levels, global diesel consumption reached a new high in the fourth quarter of 2021. The boom reflects the changing economic recovery of Covid, as the demand for transportation increases. to facilitate procurement. Disorder of the chain.

European processing plants have struggled to stimulate this demand. One of the most important reasons for this is natural gas prices. Refineries use the gas to produce hydrogen, which is then used to extract the sulfur from diesel. Rising gas prices by the end of 2021 made this process more prohibitive and reduced diesel production.

Even low-sulfur crude oil suffers from supply shortages: OPEC + countries that produce this type of oil, such as Nigeria and Angola, cannot increase production. Any additional production must come from Saudi Arabia and the United Arab Emirates, but both produce raw materials with a high sulfur content.

Stocks of diesel fell to dangerously low levels before the war, particularly in the US and European oil hubs of Antwerp, Rotterdam and Amsterdam (ARA). U.S. diesel inventories fell to a 16-year seasonal low last week. In the ARA region, they are at the lowest seasonal level in the last 14 years.

Now the conflict in Ukraine is making the bad situation worse. Europe is the region with the largest diesel deficit in the world, counting on Russian supply to close the hole. In 2019, around 1.4 million barrels per day imported into Europe, about half, or 685,000 barrels, came from the former Soviet Union. 285,000 barrels were also imported from Saudi Arabia. Europe is also a global hub for diesel prices, so everything that happens in Europe is reflected in the world.

For Northern Germany, which receives Russian seafaring goods directly via Hamburg and other ports, the loss of Russian supply is particularly severe. Reflecting the crisis, European diesel wholesale prices hit a new high last week. The diesel premium for immediate delivery exploded – at one point 100 times higher than normal – in extreme restraint.

The situation has worsened as Europe imports not only ready-made diesel from Russia, but also semi-refined oil, which it processes further to produce diesel. The lack of these raw materials, including vacuum kerosene and direct-start fuel, is forcing some converting manufacturers to cut materials. Shell Plc and OMV AG have also started to limit wholesale supplies. OilX, a consultant, told clients they saw “a physical risk of diesel shortages in Europe”. Personally, oil traders and oil companies say the same thing. Nobody wants to sound the alarm for fear of breaking into gas stations, but everyone is pretty worried.

If nothing changes, as early as April some European countries may have to limit diesel sales to maintain stocks.

China, a major diesel exporter that could provide assistance, is cutting overseas sales to save fuel in return on the domestic market. Saudi Arabia, Europe’s main supplier of diesel, no longer sells, it buys.

Europe faces another problem. The region accounts for around one third of the world’s biodiesel production. But after Ukraine’s vegetable oil exports were virtually stalled by the Russian invasion, the price of rapeseed oil, the main ingredient in biodiesel, soared, putting European production at risk at the worst possible time.

Europe and the United States have some tools to deal with. In addition to strategic oil stocks, they both have diesel and fuel oil stocks that they can launch to reduce deficits. Governments in Europe need to be proactive. Last year, the British government reacted very slowly to the fuel shortage, and by the time it did, it was too late.

Western politicians are stuck with screens showing the price of oil – they should focus on diesel instead. If something breaks down in the oil market soon, diesel is the most likely candidate.

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Javier Blass is a Bloomberg Opinion commentator focusing on energy and commodities. Previously, he was a commodity editor at the Financial Times and co-author of “The World for Sale: Money, Power and Merchants Change World Resources”.

Source: Washington Post