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Diesel markets are gearing up for a chaotic February

Strikes yesterday started in three refineries in France operated by TotalEnergies. These three facilities have suspended the supply of gasoline and diesel for the wholesale market, and one of them has reduced to a minimum.

Across the Atlantic, refineries are gearing up for the maintenance season. According to Reuters, twice as many refineries will be closed this season for repairs to make up for maintenance delays during the pandemic. Less gasoline and diesel fuel will be produced, and therefore less will be exported to Europe.

This would be the same Europe that, like the European Union, declared an embargo on the import of Russian fuel on February 5th. Russia is currently the largest supplier of fuel to the EU, especially diesel.

Ahead of the embargo, traders are buying Russian diesel, and the flow into tanks is the highest in a year, according to Reuters. But what happens on February 6thth?

One thing is certain: the United States will not be able to step in and help in the way it helped with LNG shipments as a replacement for Russian pipeline gas. The reason the United States won’t be able to help is that their diesel supply situation is quite dire.

It’s so scary, in fact, that Bloomberg reported that cargoes of diesel fuel are diverted from their original destinations in Europe to new destinations in the USA. The report cited a cold snap in December that caused the temporary shutdown of a third of processing capacity on the Gulf Coast and the recent shutdown of a fuel pipeline in New York Harbor.

Related: EIA inventory report pushes oil lower

Inventories of middle distillates are lower than usual in the world’s largest oil producer, and demand remains quite strong, although the Energy Information Administration forecast lower prices of both gasoline and diesel fuel this year due to weaker demand.

So there is not enough diesel for comfort in the United States, and even less diesel for comfort in the European Union, with only a few days until traders are cut off from Russian fuel. After that, the collective West will have to look to the East for the fuel that powers every economy on the planet.

By the way, the East is ready. Those refineries that Chinese tea makers started building a few years ago, which some analysts warned would become stranded assets before they were completed, are likely to come in handy. And with discounted Russian crude and much more generous fuel export quotas, Chinese refiners can turn a pretty good profit.

Indian refiners are also ready to help export diesel fuel. Wood Mackenzie recently released a forecast for higher diesel production across Asia, citing India, Japan and South Korea as drivers of the increase.

Middle Eastern oil producers too stand ready to lend barrels of diesel to their European and American clients. Refineries are expanding in the UAE and Saudi Arabia, increasing production capacity at the right time. Some analysts believe that Middle Eastern fuel exporters could even buy and then resell Russian fuel to Europe.

“Sprinkle it Salt Bae style with a few drops of someone else’s diesel, it’s not Russian anymore,” Viktor Katona, an analyst at Kpler, told Middle East Eye.

In essence, the February embargo will further change trade routes in the oil market. Just as much more Russian crude is now going to Asia and more Middle Eastern oil is going to Europe, more Russian fuel will begin to go to Africa and Latin America as Middle Eastern fuel goes to Europe. Asian fuel will also be diverted from all sides to Europe.

According to research director Wood Mackenzie Mark WilliamsRussian fuel being diverted to Latin America and Africa – formerly the domains of US fuel exports – will free up more US fuel for export to the European Union.

This will, of course, affect prices, because while some routes will be relatively short — from the Middle East to Europe — others, such as China to the Netherlands, will be longer and therefore more expensive. The same will apply to Russian exports to Latin America. Add to this the effects of the maintenance season in the United States, and diesel prices look set to soar.

Since diesel is used to transport goods, more expensive diesel will lead to more expensive goods. The embargo will therefore add momentum to the inflation that is already worrying governments on both sides of the Atlantic.

Perhaps this effect will be temporary, and prices will fall once the new export routes are firmly established — and new European suppliers begin to operate at full capacity from those boosted refineries. Or maybe more energy problems are on the horizon for Europe and parts of the United States as economists debate what a recession actually is and whether any of the world’s leading economies are in one.

By Irina Slav for Oilprice.com

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