Russia Sanctions Collateral Damage: Diesel Shortage Risk Worsening, EV Batteries

Russia Sanctions Collateral Damage: Diesel Shortage Risk Worsening, EV Batteries 1

Forgive me for what amounts to news snippets, since these items overlap with Links terrain. But the Russian sanctions induced energy squeeze looks to be bearing down on Europe and the US even faster that most sources anticipated.

First are diesel shortages, which we had warned about virtually from the get go. Russian gas is heavier than either fracked gas or Saudi light sweet crude. Heavier means more long chain hydrocarbons which are more energy dense. Lighter grades can be used to make diesel…but that’s at the expense of the gas which you presumably also wanted to have.

We had pointed out that diesel shortages are so imminent that the IEA is recommending aggressive energy conservation measures now, like more work at home, more ride-sharing, cutting air travel, so as to reduce the severity of the crunch they expect to kick in over the next four months.

The news on the diesel front is only getting worse. From the first of two germane stories on OilPrice, an overview called Europe Faces Systemic Diesel Supply Crunch:

Europe risks being exposed to a “systemic” deficit of diesel supply that could worsen and even lead to rationing of fuel, the top executives of the world’s largest independent oil traders said on Tuesday….

“This is a global problem but for Europe it’s very hard because Europe is so short” of diesel, Gunvor CEO Torbjorn Tornqvist said at the Financial Times Commodities Global Summit as carried by Bloomberg.

Europe’s diesel shortage is worsening as Russian oil refiners have started to cut back on refinery throughput, Tornqvist added.

Diesel stocks globally were already low even before the Russian invasion of Ukraine, but the shortage has now been exacerbated by the lower global diesel supply from Russia.

In the highly volatile global energy markets since Russia’s war in Ukraine began, even the biggest traders are exposed to rising margin calls. Via futures contracts in commodities, trading houses hedge against risks. Without commodity derivatives, many traders would not be able to move physical volumes of oil.

The European Federation of Energy Traders (EFET), whose members include Trafigura, Vitol, Shell, and BP, among others, has urged European central banks for “time-limited emergency liquidity support to ensure that wholesale gas and power markets continued to function,” the Financial Times reported last week, citing a letter the federation sent earlier this month.

The possibility of a derivatives shock blowing back to the physical market is a new angle, but after the LME canceled a full day of nickel trades so as not to blow up the exchange or too many big fish, do not underestimate the extreme measures that will be taken to keep perceived-to-be-too-critical-to-fail institutions and players alive.

A more specific wrinkle on the diesel squeeze story, mentioned in the piece above, is Russia Cuts Refinery Output As Diesel Shortage Worsens:

Trade with Russian diesel is becoming scarcer because of buyers in Europe steering clear of Russian shipments…

The “self-sanctioning” of the buyers has already started to force Russian refiners to reduce production, according to Gunvor’s [CEO Torbjorn] Tornqvist.

“What does that mean? It means more crude oil will need to be exported instead of the products, and we believe that is not possible and will lead to cutbacks in Russian production,” he said, as carried by Bloomberg.

Diesel stocks globally were already low even before the Russian invasion of Ukraine. According to estimates from Reuters’ John Kemp, diesel fuel stocks in Europe are at their lowest since 2008, and 8 percent—or 35 million barrels—lower than the five-year average for this time of the year.

In the United States, the situation is graver still. There, diesel fuel inventories are 21 percent lower than the pre-pandemic five-year seasonal average, which translates into 30 million barrels.

In Singapore, a global energy trade hub, diesel fuel inventories are 4 million barrels below the seasonal five-year average from before the pandemic.

On top of exacerbating a global diesel supply crunch, the sanctions against Russia are also likely to force Russian firms to shut in some crude oil production, analysts say. Russia will have to shut in some of its oil production as it will not be able to sell all the volumes displaced from European markets to other regions, with Russian crude production falling and staying depressed for at least the next three years, Standard Chartered said earlier this month.

So the perceived need to stay well away from anything Russian, even when it’s energy and other commodities that the sanctions were originally designed to carve out, is going to create quite a bit of pain. Yet even though this impact is widely acknowledged in the business press, there seems to be no will to do anything about it.

RT has a new story about how damage to a key pipeline to Europe is going to make the energy crunch worse over the next three weeks, if not longer. Hat tip Kevin W:

The Caspian Pipeline Consortium (CPC) – one of the world’s key pipelines – was forced to suspend the operation…As a result of the incident, the oil deficit on the world market is expected to increase significantly, according to experts.

The pipeline, which ships around 1.2 million barrels of crude oil daily from Kazakhstan to Europe and the US, said in a statement the condition of two hoses has not allowed “safe operation of the device.”

“We have to eliminate any risk of oil getting into the sea, so, of course, this equipment was to be decommissioned for preventive maintenance,” CPC Director General Nikolay Gorban explained.

He said that the repairs on each of the damaged floating hoses – which should be fixed one after another rather than simultaneously – would take at least three weeks. However, the weather conditions remain a major factor when it comes to the work timeline….

“In this situation, the management of the Consortium has to report possible reduction in the volume of oil transportation in the nearest future by a factor of three from the requests of shippers,” the pipeline, which is co-owned by Russia, Kazakhstan, and a number of major international oil market players, said in a statement.

Temporary disruption to the operation of one of the biggest pipelines in the world will affect many, but especially consumers in southern Europe – Italy, Spain, and the south of France traditionally receive oil from the affected CPC’s remote mooring device, Russia’s Financial University expert and leading analyst of the National Energy Security Fund Igor Yushkov said….

Besides southern Europe, the incident on CPC might be “an unpleasant event for the US,” Yushkov said.

“About 10-15% of volumes went (from this terminal) to the US market. For the United States, this is also an unpleasant event – they have just rejected the Russian oil, they need to look for an alternative supplier, and then another supplier interrupts supplies. Therefore, as a result, fuel prices in the US domestic market may rise,” the expert claimed….

“If this event coincides with other factors, a perfect storm could set in and prices could soar back to $140 to $150 a barrel,” he said.

The good thing about today’s news is that the problem is only temporary, stressed another expert, Kirill Rodionov from the Institute for the Development of Technologies in the Fuel and Energy Complex. According to his calculations, “starting from the third quarter, CPC will resume oil shipments in the same volumes.”

The pipeline operators made dutifully sincere noises about how sorry they were and how they would get everything fixed up as soon as possible. The article also said that the pipeline would be back to its old delivery level by the third quarter, so not to worry. But it is instructive to note the peculiar sensitivity about oil delivered via Russian tankers, versus the lack of much revulsion about gas and oil sent through pipelines. Out of sight, out of mind?

Finally, we along with many many others warned of the impact on automobile production, like platinum for catalytic converters, and rare earths and other metals used to build green energy generators like wind turbines, and related infrastructure, like batteries.

The battery crunch is starting, first in the form of rationing by higher prices. From yet another OilPrice piece, Batteries On A “Ridiculous” Cost Surge, Chinese EV Maker Says:

Battery prices for electric vehicles are seeing a “ridiculous” increase on the back of soaring raw material prices, and carmakers will soon have to raise prices if they haven’t done it yet, according to the top executive of Chinese electric vehicle manufacturer Li Auto Inc….

Because of rising costs for raw materials, Contemporary Amperex Technology Co. Ltd. (CATL), the largest battery maker in the world, already announced today in a statement to Reuters that it had raised the prices for some of its battery cells, without giving additional details of the price hike.

China’s Li Auto has not yet announced any price increases for its EVs.

Rising costs for raw materials and logistics have already made Tesla raise its prices for China and the United States. This month, Tesla raised its prices for the second time in less than a week.

Costs of raw materials and key metals for EV batteries, such as nickel and lithium, have skyrocketed since Russia’s invasion of Ukraine at the end of February…

Lithium prices were soaring even before the Russian war in Ukraine. Lithium prices hit a record high at the start of 2022…

Now the war in Ukraine is accelerating the rise in metals and minerals, and the soaring prices of batteries and of metals for all other components of cars, including aluminum, have already started to translate into higher EV prices, potentially slowing down the speed of EV adoption.

The one small bit of upside is the commodities price crunch will take some wind out of Elon Musk’s sails. But smaller fry will suffer.

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