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Europe’s diesel supplies will remain ‘tight’ as Russia embargo looms, Rystad says

Diesel supplies in Europe will remain tight as the continent looks to reduce its reliance on Russian imports, Rystad Energy said in a research note on Saturday.

Europe is in a race to secure more diesel shipments before an EU ban on oil product imports from Russia, its biggest supplier, comes into effect on February 5.

Faced with limited options, European traders have boosted their imports of Russian diesel before the embargo.

“When it comes to diesel, the EU is caught between a rock and a hard place,” said Mukesh Sahdev, senior vice president at Rystad Energy.

“There does not seem to be enough to meet current or future demand.”

After dropping to a low of 450,000 barrels per day in September, Europe’s diesel imports from Russia have risen to an average of 600,000 bpd over the last two months, data from Rystad Energy showed.

Meanwhile, imports from other markets such as the Middle East and Asia have doubled to 1.2 million bpd in October, from January levels, the Norway-based consultancy said.

The International Energy Agency (IEA) has said that “persistently high” diesel prices and a slowing economy could result in demand for diesel and gas oil falling to 400,000 bpd in 2022, from 1.5 million bpd last year, before declining slightly in 2023.

Diesel is the backbone of global economic activity and markets were already in a deficit before Russia’s invasion of Ukraine began in February.

This was due to the closure of 3.5 million bpd of refinery distillation capacity since the start of the Covid-19 pandemic, resulting in a net decline of 1 million bpd, the Paris-based agency said in a report this month.

Although diesel prices have dropped from their June peaks, average prices are still $50 higher than pre-pandemic levels.

“Any change in pricing will come from cuts to demand as a result of high prices, rather than the supply side which will remain tight,” said Mr Sahdev.

“Overall, the high diesel price distortion is going to continue and remains a key driver for inflation across all sectors including energy, transport, food and construction,” he added.

September and October are seasonal months of high diesel demand in Europe followed by a drop, with demand usually picking-up in February again.

With Russian crude exports dwindling and a total ban on product imports only months away, Europe has an “impossible target” to achieve, said Mr Sahdev.

“Europe neither has the refining capacity to make diesel nor it can import to plug the hole that will be created by February 5.”

As of October, EU countries have reduced Russian crude oil imports by 1.1 million bpd to 1.4 million bpd.

When the crude and product embargoes come into full force in December and February, respectively, an additional 1.1 million bpd of crude and 1 million bpd of diesel, naphtha and fuel oil will need to be replaced, according to the IEA.

The Group of Seven advanced economies (G7) is ready to impose a price cap on Russian oil from December 5. The goal is to keep Russian barrels in the market without allowing Moscow to reap the benefits of high prices.

EU diplomats say they need more time before resuming negotiations to cap the price of Russian oil, 24 hours after failing to agree on the $65-$70 a barrel ceiling suggested by the G7.
Source: The National News

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