BAKU, Azerbaijan, Nov.26. When it comes to diesel, the European Union is caught between a rock and a hard place, said Senior Vice President at Rystad Energy Mukesh Sahdev, Trend reports Nov.26.
“Europe is in a race to increase diesel stocks as the fear and uncertainty over the February 5 phase out of imports from Russia takes effect. Europe has been preparing by securing higher imports from the rest of world over the past months. However, there does not seem to be enough to meet current or future demand. Europe diesel/components imports from Russia have come down from peak of 800 kbd pre-war to lowest level of 450 kbd in Sep. For Oct and Nov, imports are rising to a month average of 600 kbd,” said the analyst.
Sahdev noted that imports from the rest of the world have doubled from 600 kbd in Jan to 1200 kbd in Oct, with 60 percent coming from the Middle East and the rest of Asia.
“September and October are seasonal months of high diesel demand in Europe followed by a drop with demand usually picking-up in February again. The diesel demand in Europe swings seasonally by 1 mbd across the year and imports are necessary to manage the swing. Europe is in a bind as it faces limited import options. A European rush for Russian diesel barrels has emerged during the last few months before the phase out. Europe’s refining system is currently operating at 1 mbd lower level than pre-pandemic and with the loss of Russian crude, the challenges for Europe refining will only increase. To rise above current 11.5 mbd level of refinery runs would be challenge compared to the pre-pandemic high of 12.8 mbd,” the expert explained.
Mukesh Sahdev went on to add that on the other hand, the loss of another 500 kbd of diesel needs another 1.0-1.5 mbd of higher refinery than current levels.
“This is an impossible target for Europe to achieve. Europe neither has the refining capacity to make diesel nor it can import to plug the hole that will be created by Feb 5. Despite significant correction of 50-60 $/bb from the peak in June, the average diesel prices are still 50 $/bbl higher now than pre-pandemic levels. Europe is bracing itself for the long haul with higher diesel prices, and there is no easy solution in sight. 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. 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 said.
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