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LONDON, March 24 (Reuters) – Worsening diesel shortages in the United States and the rest of the world are mounting upward pressure on oil prices and threatening to recreate the conditions that led to the record surge prices in 2008.
U.S. inventories of distillate fuel oil, the category that includes diesel, fell 2 million barrels to 112 million barrels last week, according to high-frequency data from the U.S. Energy Information Administration (EIA).
Distillate inventories have declined in 52 of the past 79 weeks by a total of 67 million barrels, and are at their lowest for the time of year since 2014 and before 2008 (“Weekly oil status report”, EIA , March 23).
Distillates have become the tightest part of the oil market: US inventories are 20% below the pre-pandemic five-year average for 2015-2019, against shortfalls of 11% for crude and 1% for gasoline .
If inventories move in line with seasonal trends over the past ten years, inventories should fall to a low of 104 million barrels before the middle of the year, making them as tight as they were in 2008.
In a reasonable worst-case scenario, however, inventories could run as low as 93 million barrels, which would be extremely low and put explosive upward pressure on prices.
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Similar shortages of distillates have emerged in Europe and Asia, as the rapid recovery in consumption after the pandemic has outpaced increased crude oil production and diesel production from refineries.
At the end of February, stocks of European distillates had already fallen to the lowest seasonal level since 2008. Stocks in Singapore are currently at the lowest seasonal level since 2006.
Middle distillates such as diesel and gas oil are primarily used in freight transportation, manufacturing, agriculture, mining, and oil and gas extraction, making them the most sensitive part to oil industry cycle.
The synchronized global expansion in North America, Europe and Asia created an acute shortage as in 2007/2008.
As a result, distillate prices drive the broader oil market higher, with upward pressure on diesel prices spilling over into the adjacent gasoline market and the upstream crude market.
In the United States, the average on-road diesel price has climbed 61% over the past year, compared to a 47% rise in gasoline prices, according to the EIA.
In 2008, distillate shortages helped push crude oil to an inflation-adjusted peak of more than $187 a barrel by mid-year, after distillate inventories hit abnormal seasonal lows a few months earlier.
INVASION IN UKRAINE
A similar scenario seems to have played out this year. But Russia’s invasion of Ukraine and the sanctions imposed in response threaten to further aggravate the shortage of distillates.
Russia is a major exporter of middle distillates as well as residual fuel oil and distillate-rich crude oil, mainly to European countries.
Russia accounted for 29% of Europe’s imported crude oil and 39% of its imported products in 2020, according to BP (“Statistical review of world energy”, BP, 2021).
Russia’s invasion of Ukraine and escalating sanctions pose a growing threat to these distillates and other oil streams.
Futures markets priced in a possible disruption by pushing distillate prices to a huge premium over crude.
First-month European diesel futures are trading at a premium of $46 a barrel to Brent, from $15 before the invasion and less than $4 a year ago.
In real terms, current diesel prices of around $167 a barrel are already in the 97th percentile for every month since 1990, although still well below the inflation-adjusted peak of $226 in 2008.
Ultra-high prices are a signal for refiners to maximize crude processing and distillate production, and for consumers to reduce diesel use as much as possible, to replenish depleted inventories.
Over the next three months, diesel production should ramp up significantly, consumption growth should slow down, and the market should avoid a major loss of Russian exports.
If this is not possible, the result is likely to be a sharp price spike, which will lead to reduced consumption through a slowdown in the business cycle.
– Global diesel shortage increases risk of oil price spike (Reuters, March 11) read more
– US diesel stocks set to fall to critical level (Reuters, February 17) read more
– World oil inventories are exceptionally tight (Reuters, February 15) read more
– Diesel is the inflation canary of the US economy (Reuters, February 9) read more
John Kemp is a market analyst at Reuters. The opinions expressed are his own.
Editing by Jane Merriman
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