Although There Is a Decline in Diesel Scarcity, There Is Still a Long Way to Go If Key Players in This War Like Russia, Ukraine, the United States, and Europe Do Not Reach a Resolution

Refineries Are Working Overtime to Produce Diesel to Meet International Market Demand

Macaé, December 20, 2022 – The invasion of Ukraine had a significant impact on diesel prices as Russia was a major supplier of fuel to countries such as Europe and the United States. Refineries worldwide have ramped up production of the distillate to compensate for the loss of Russian supply following sanctions on Moscow, making it difficult for these barrels to reach purchasing countries through the necessary logistics.

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

However, there are signs that the initial deficit that caused spreads to spike is beginning to diminish as supplies start to gradually recover from their lows. Notably, diesel supply is not at a healthy level anywhere in the world. However, things are improving and traders’ fears of a supply shortage are dwindling.

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Currently, diesel prices are falling daily, and future spreads have recently been in territory close to contango (when the current contract is cheaper than the immediately following one – indicating an oversupply and that inventories should start to rise). The speed at which prices have fallen has been excessive, but the trend itself has been appropriate as long as supply remains constrained in the markets.

The country with the worst deficit of refined fuels started bringing in more supplies from other countries. Diesel imports to Canada’s East Coast and Europe have dramatically increased.

Before the European ban in November, European buyers were purchasing large quantities of Russian products, mainly fuel. This led to a spike in prices in Rotterdam, Netherlands.

In third place, as part of China’s export effort, the government dispatched more fuel. Flows may increase further if promised volumes are not fully met. But stocks in Southeast Asia remain at record levels.

Diesel Deficiency

The diesel shortage has been noticeably evident on the U.S. East Coast this winter after the Department of Energy issued an alert about potential shortages. In 2019, a major fire at a 350,000 bpd refinery left the region more dependent on PADD3 imports via pipelines or the international market than before.

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

Diesel shipments to the East Coast have been rising for several months, and stocks are up from 30-year lows, but it has only been recently that imports started to gain momentum. Winter is shaping up to be easier than we thought.

Before the embargo on Russia took effect in February, Europe purchased large quantities of diesel, including from Russia. The European exchange continues to rise and has just hit its highest point since early 2022. Adding to this scenario is the possibility of Europe having a milder winter than typical due to the La Niña phenomenon. Optimistically, we should move forward with less robust spirits.

There Is a Natural Gas Shortage and China Is Exporting Fuel.

Additionally, the issue of natural gas, hopefully resolved at least for this winter, has been a crucial matter that has caused the diesel market to move more, especially in Europe. As LNG imports continue at the current pace, Europe is likely to avoid having to make significant stock withdrawals, even if a strong cold wave occurs.

China has finally expanded its exports of refined products, adding to the positive effects of rising markets in Europe and the United States. Nearly half a million barrels per day (bpd) of diesel are being exported from China, largely to Europe, to offset the shortage of Russian supplies.

Although the current level of Chinese exports is higher than normal for this time of year, it has not been enough to alleviate the fuel shortage in Southeast Asia in the past. One of China’s largest export markets, Singapore, continues to experience seasonal lows in distillate fuel stocks. The same goes for other Asian countries, including South Korea and Japan. It is worth noting that China has not met promised export volumes, perhaps

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