Low diesel inventories and high cracks spreads should attract global diesel to Europe

As Europe heads into its first winter after banning petroleum product imports from Russia, diesel imports from alternative trade partners look likely to keep the region relatively well supplied. Despite recent supply disruptions from refinery outages in the Middle East and India, the conclusion of maintenance and addition of refining capacity should sustain diesel imports into Northwest Europe. Nevertheless, low diesel stocks and lengthier shipping routes from alternative suppliers are likely to keep diesel crack spreads in Europe high during the winter.

During winter, diesel fuel in Europe is used for peak electricity generation, home heating, and transportation. As of December 7, 2023, gasoil inventories (which include diesel fuel and heating oil) in the major refining and petroleum trading centers of Northern Europe (Amsterdam and Rotterdam in the Netherlands and Antwerp in Belgium—collectively known as ARA) were near the bottom of the previous five-year (2018–22) range (Figure 1). Unplanned refinery outages in Europe over the summer and again more recently contributed to decreasing inventories since May 18.

Backwardation in the futures price curve (when near-term prices are higher than longer-dated prices) began increasing in May, around the same time that diesel inventories in the ARA region began declining (Figure 2). Backwardated markets indicate short-term supply tightness. As market participants secure diesel supplies heading into this winter, they are bidding up the near-term prices. Backwardation also increased earlier this year. In January and February, although gasoil inventories were increasing and near their five-year average, market participants bid up the near-term prices (increasing backwardation) to secure supplies before the EU ban on seaborne imports of petroleum products (including diesel fuel) from Russia took effect on February 5, 2023.

Prior to the petroleum product import ban, diesel imports from Russia made up a significant portion of Northwest Europe’s total diesel imports. Since the ban, diesel imports into Northwest Europe from the United States, India, and several countries in the Middle East have increased (Figure 3).

According to Vortexa Analytics, from January 2022 through January 2023 (the month prior to the EU’s ban) diesel imports from Russia into Northwest Europe averaged 380,000 barrels per day (b/d). Between February 2023 and November 2023, diesel imports from Russia fell to nearly zero. Global diesel trade adjusted, and several countries increased exports to Northwest Europe, replacing Russia’s barrels. Northwest Europe has remained relatively well supplied with diesel fuel despite several recent refinery interruptions that limited supplies from India and the Middle East.

From January 2022 to January 2023, diesel exports from India to Northwest Europe averaged 55,000 b/d and increased to 110,000 b/d between February 2023 and November 2023. Recent maintenance at Reliance’s Jamnagar refinery reduced diesel exports from India to Northwest Europe in October to an average of 80,000 b/d. Exports in November increased to 176,000 b/d, reflecting a partial restart of the Jamnagar refinery, according to trade press reports.

Diesel exports from Saudi Arabia to Northwest Europe averaged 80,000 b/d between January 2022 and January 2023 and increased 68% (54,000 b/d) between February 2023 and November 2023, the largest volumetric increase from a country in the Middle East. Kuwait, the United Arab Emirates, and Qatar also increased their exports, together totaling an increase of 74,000 b/d over the same time periods. However, diesel exports from the Middle East to Northwest Europe fell to 166,000 b/d in November, the least since December 2022 (Figure 4).

The low diesel exports from the Middle East to Northwest Europe in November were driven in part by maintenance at the SATORP refinery in Jubail, Saudi Arabia. Exports from Saudi Arabia fell from 148,000 b/d in September to 44,000 b/d in November. In addition, operations at Kuwait’s Al-Zour refinery were temporarily shut down in early November, reducing diesel exports from Kuwait to Northwest Europe from 79,000 b/d in September to 3,000 b/d in November.

Diesel supplies from the Middle East are likely to increase over the next few months as refineries complete their maintenance. Maintenance at the SATORP refinery was scheduled to be completed in mid-November, and trade press reports indicate the Al-Zour refinery is now fully operational but will gradually ramp up to its full refining capacity of 615,000 b/d. In addition, Oman’s Duqm refinery recently exported its first shipment of diesel fuel, and the refinery is expected to reach full capacity by the end of this year, providing additional diesel barrels to global supply.

Diesel exports have also increased from the United States to Northwest Europe. From January 2022 to January 2023, exports averaged 72,000 b/d but increased 98% to 142,000 b/d between February and November 2023. Preliminary data from Vortexa Analytics indicate additional growth in December. Most U.S. petroleum exports leave from the Gulf Coast, where diesel inventories are above the previous five-year average. Recent tanker rates for clean Medium Range (MR) tankers from the U.S. Gulf Coast to the UK/Continent increased from $7,370 per day on November 1 to $42,986 per day on December 7, indicating strong demand for MR tankers. Recent trade press reportsindicate that shipping rates from the Middle East Gulf to UK/Continent are also increasing.

The longer voyages from new sources and low inventories have increased diesel crack spreads. As of December 8, diesel crack spreads in the ARA region were 69 cents per gallon (gal), well above the previous five-year average of 36 cents/gal (Figure 5). Several uncertainties remain, however, and could alter diesel supplies in the ARA region. The severity of winter weather and supply of natural gas may affect the demand for diesel fuel. Natural gas supplies in Europe are relatively high now, but colder weather could increase inventory draws as heating and electricity demand increases. Additional refinery outages or delays restarting refineries may occur, which would limit global diesel supply.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.