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.
