Paradox Of Why There Is A Shortage Of Diesel In A Market With Excess Oil

Although the correlation between oil and fuel prices is far from perfect (margins, taxes, labor costs… prevent a perfect transmission), the truth is that in the end (with some lag) a fall in the price of oil It is usually transferred, at least in part, to the final price of gasoline and diesel. However, in recent weeks an atypical phenomenon has been observed: the fall in oil is being transferred to gasoline, but not to diesel or diesel , which is still close to two euros per liter. What is happening in the market? Why today does a liter of diesel cost up to 20 cents more than gasoline?

The latest data published by the European Commission and specialized pages reveal that diesel is distancing itself from gasoline. In the case of Spain, the liter of diesel appears this Thursday in the area of ​​1.93 euros per liter, while in the case of 95 gasoline it is 1.73 euros per liter, an unprecedented gap in Spain. Gasoline has fallen in price with the fall in oil, while diesel has barely moved, what’s more, in recent weeks its price has rebounded.

The International Energy Agency (IEA) has solved some of this mystery in its monthly report on the oil market. The IEA argues that there is no more capacity in the refineries to produce diesel, which has led this market to an almost permanent deficit (more diesel is consumed in the world than is produced).

The information published by the agency is somewhat worrying, since the situation could worsen in the coming months as sanctions on oil and derivatives from Russia are strictly enforced. Without the production of Russian refineries, advanced countries could suffer a real shortage of diesel with the consequent rise in the price of this fuel.

Russia is vital in the fuel market. Moscow is the world’s largest exporter of derived products (it has a large network of refineries). According to the IEA, Russia would export under normal conditions some 2.85 million barrels per day (mb/d) of petroleum products, of which 1.1 mb/d are diesel, 650,000 fuel oil, 500,000 naphtha and 280,000 gasoline. vacuum gas oil (VGO). Gasoline, LPG, jet fuel and petroleum coke account for some 350,000 barrels per day.

More oil will not be synonymous with cheaper diesel
The IEA explained that the market is entering a phase of excess oil supply (a million more barrels per day are being produced than is consumed), which is putting downward pressure on the price of crude oil: a barrel of Brent has fallen by more than $30 in recent months. However, this drop in crude oil is not being transferred in the same way to fuels, especially diesel and kerosene used by planes. While refineries are being able to process all the gasoline that is needed, the same is not happening with diesel.

For this reason, the agency “expects that the derivatives markets, especially diesel, will remain in deficit due to the lack of refining capacity outside of China. The world diesel markets are very tight due to solid demand, together with some lower Chinese export prices, which have drastically reduced their sales abroad.

A barrel of diesel costs $40 more than a barrel of oil.
Today, only China has idle capacity in the refineries that have machinery and infrastructure specially dedicated to the diesel refining process, which is putting this market in a very tense situation that is reflected in the crack spread (difference between the barrel of diesel and oil) of diesel, which has shot up to 40 dollars, while the crack spread of gasoline has gradually returned to normal areas after having soared during part of the summer and spring.

The differential with gasoline is normalized
The raw materials consultant JLC ​​expects Chinese diesel exports in 2022 to be reduced by 74% compared to 2021, to 4.5 million tons, while gasoline exports will fall somewhat less: 40% to 9 million. of tons. These quotas that China has imposed as part of its plan to reduce emissions and preserve the environment are creating a problem for the rest of the world.

In addition, the West has not built refineries for decades , while investment in active plants has been scarce, which generates limits on the production of derivatives. On the other hand, experts assure that it is not easy for these plants to increase diesel production to the detriment of gasoline production (now it is less scarce) because the necessary processes and inputs are different.

The worst may be yet to come
Until now, the EU has largely kept Russian diesel import volumes at around 600,000 barrels per day, but from next February these volumes will need to be replaced by other sources. Europe’s salvation is expected to come from three major refinery projects in Kuwait, Nigeria and Mexico due to come on stream by the end of 2023, which would see diesel output rise.

On the other hand, the IEA believes that “the proposed price cap mechanism should also work to ensure that the overall supply of diesel for the global market is met and that European importers can start buying flows from the US, Middle East and India. Otherwise, and assuming Russia is unable to ship diesel in significant quantities outside the price cap, European, Latin American and African importers could be forced to compete for less diesel.”

In addition, diesel inventories in the US are currently at a critically low level, they say from Reuters, which will not help to solve the shortage of this distillate in advanced countries. Experts say that this shortage in the US will maintain upward pressure on diesel refining prices and margins. Distillate stocks are at their lowest level for this time of year since 1996.

To prevent the diesel shortage from becoming more serious, it is vital that the refineries under construction in Kuwait, Nigeria and Mexico come to fruition. Still, they won’t be running at full capacity until the end of 2023, while the full embargo on Russian crude and derivatives goes into effect later this year. Unless some unexpected event occurs, diesel could continue to be scarce and, therefore, maintain a relatively high price.

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