Global diesel prices have hit a near three-month high as traders fear Houthi attacks on shipping in the Red Sea will raise costs for consumers and disrupt crucial supplies from Asia to Europe.
Gasoil futures, the global benchmark, have risen 15 per cent from mid-December, to $845 a metric tonne, reflecting investors’ growing concerns that Europe will be squeezed by supply chain issues in coming months.
The continent, one of the world’s largest purchasers of refined petroleum products, has relied on imports from Asia and the US in the past year after the EU banned the use of Russian diesel in the bloc.
But analysts warn refinery maintenance in the US will further cut supplies across the Atlantic and further drive up the price.
“This will leave Europe more reliant on east-of-Suez barrels, and that’s why the disruptions to shipping in the Red Sea will have a huge effect,” said Natalia Losada, an oil products analyst at Energy Aspects, a research group.
“We see tighter European diesel balances in the upcoming months . . . which will provide [an] upside to time spreads and retail prices.”
Rising prices may further test the resilience of the European economy. Diesel is the workhorse fuel for the region, widely used in freight and aviation as well as for heating many homes.
The continent typically relied on Russian imports but these were banned by the EU after the latter’s invasion of Ukraine. Initially the Middle East took up the slack, accounting for about 60 per cent of Europe’s diesel last year. Following the war in Gaza, that has fallen to about a third, according to data from S&P Global Commodity Insights.
“The prospect of more expensive diesel . . . exacerbates economic challenges, contributing to a burgeoning cost of living crisis,” said James Noel-Beswick, a distillates trading analyst at Sparta Commodities.
The attacks by Houthi rebels have further changed traders’ calculations, as vessels are forced to bypass the main transit route from Singapore to Rotterdam via the Red Sea, and go around the southern African coast.
Gasoil futures prices remain far from their level of $1,600 a metric tonne in the wake of Russia’s invasion of Ukraine but have moved higher in part to pay for the extra 6,000 miles and two weeks in shipping costs.
Benedict George, Europe diesel pricing lead analyst at Argus Media, said: “Prices are slowly adjusting to incentivise traders to do more costly things to make sure supply reaches Europe [such as] to accept huge insurance costs, go all the way round the Cape of Good Hope or figure out different sources of diesel for Europe.”
“The price move is gradual because it is not yet clear how long this situation will persist,” he added.
In recent weeks alternative supplies from the US have helped Europe cover the shortfall, as refineries there doubled shipments to 10mn barrels in January, from 4mn barrels in November.
But many US Gulf coast refineries are sharply reducing production as they upgrade their facilities and analysts say there will be less surplus diesel available for Europe.
Losada estimates production capacity will fall by a tenth, or 1mn barrels, in January and February. That compares with the average of 100,000 a day that were offline because of maintenance work in December, and is about a tenth of the US’s total refining capacity of about 10mn barrels a day.
The turbulence in the Red Sea has coincided with a decline of stocks at the crucial Amsterdam-Rotterdam-Antwerp region, known as ARA, making Europe even more vulnerable to a reduction of supply as its own refineries undergo maintenance.
Europe built up its diesel stockpiles in the wake of the Russian invasion of Ukraine, with stocks at the ARA hub having reaching the bottom of their five-year range, according to Sparta Commodities, a market data provider.
Refining capacity has also been falling in recent years as policymakers sought to facilitate shifts to greener energy sources and demand dropped because of customers shifting to electric vehicles.
But David Martin, senior oil analyst at the International Energy Agency, said governments in the OECD had enough emergency stocks to counter any supply crunch. “I would argue that diesel markets and governments in the OECD are well prepared,” he said.
However, analysts fear global supplies of refined products to Europe could be further tested by the instability in the Middle East and Ukraine.
JPMorgan on Tuesday warned Ukrainian drone attacks on Russian energy infrastructure — which have increased this year — pose a “new, less appreciated, but potentially more damaging threat” to global oil product balances than shipping disruptions in the Red Sea.
“While Europe no longer buys oil products from Russia, diesel is a global market and if Russia produces and exports less, it will have an impact on global balances,” said Natasha Kaneva, the bank’s head of global commodities.
Additional reporting by George Steer