While there is a decline in the diesel shortage, there will still be a long way to go if the main players in this war like Russia, Ukraine, the United States and Europe do not reach a resolution.

Refineries are working hard to produce diesel to meet the international market

Macaé, December 20, 2022 – The invasion of Ucrania had a significant impact on the diesel prices because Russia was an important supplier of fuel to countries like Europe and the United States. Refineries around the world have increased production of the distillate to compensate for the loss of Russian supply after the Moscow sanction, making it difficult for these barrels to reach buyer countries through the necessary logistics.

Diesel yields are high for the time of year in the United States, while gasoline yields are low and the proportion of diesel to total product production is high. Given the current state of supply and demand, there are indications that refineries are working to bring as much diesel to market as possible.

There are signs, however, that the initial shortfall that sent spreads soaring is starting to narrow as supplies gradually begin to recover from their lows. Remarkably, diesel supply is not at a healthy level anywhere in the world. However, things are looking up and traders' fears of a supply shortage are easing.

Diesel prices are currently falling on a daily basis, and futures spreads have recently been in close to contango territory (when the current contract is cheaper than the immediately following one – i.e. an indication of oversupply and that inventories should start increasing). The speed with which prices fell was excessive, but the trend itself was appropriate since supply was limited in the markets.

The country with the worst deficit fuels distillates began to bring in more supplies from other countries. Diesel imports to the East Coast of Canada and Europe have increased dramatically.

Before the European ban in November, European buyers bought large quantities of Russian products, mainly fuel. This led to an increase in stock prices for Rotterdam, Netherlands.

Third, as part of China's export push, the government shipped more fuel. Flows could increase further if promised volumes are not fully met. But stocks in Southeast Asia remain at record levels.

diesel deficiency

Diesel shortages were notably noticeable on the US East Coast this winter after the Department of Energy issued a warning about potential shortages. In 2019, a major fire at a 350 bpd refinery left the region more dependent on PADD3 imports through pipelines or the international market than before.

The shortage of Russian barrels has coincided with increased competition from foreign buyers in the region for the product.

Diesel shipments to the East Coast have been up for several months, and inventories are rising from 30-year lows, but it's only recently that imports have started to pick up speed. Winter is turning out to be easier than we thought.

Before the embargo on Russia took effect in February, Europe bought large amounts of diesel, including from Russia. The European stock market continues to rise and has just reached its highest point since the beginning of 2022. Adding to this scenario is the possibility that Europe will have a milder winter than typical due to the La Nia phenomenon. With optimism, we must move forward with less robust spirits.

There is a shortage of natural gas and China is exporting fuel.

He adds that the problem of natural gas, for the time being resolved at least for this winter, was a crucial issue that made the diesel market move more, especially in Europe. As LNG imports continue at their current pace, Europe is likely to avoid having to make significant stock withdrawals even if a severe cold snap hits.

China finally expanded exports of its refined products, adding to the positive effects of rising stock markets in Europe and the United States. Nearly half a million barrels per day (bpd) of diesel is being exported from China, much of it to Europe, to make up for short supply from Russia.

While the current number of Chinese exports is higher than usual for this time of year, it has not been enough to alleviate Southeast Asia's fuel shortages in the past. One of China's biggest export markets, Singapore, continues to experience seasonal lows in distillate fuel inventories. The same goes for other Asian countries, including South Korea and Japan. It is worth noting that China has failed to deliver on promised export volumes, perhaps

Analytics by hEDGEpoint Global Markets, a company specializing in market intelligence, consulting, risk management and global commodity solutions.

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