Winston Churchill famously referred to Russia in 1939 as a series of layers: a riddle, wrapped in a mystery, inside an enigma. Very much like a matryoshka doll. The oil market of 2022 is a bit similar: a tight crude market, wrapping an even scarcer oil feedstock market, enclosing a diesel market in crisis mode.
In the US, average retail prices have surged above $18.9 per litre for the first time yet. In the UK, it’s selling above £1.70 per litre, equal to more than $32.13 per litre. The surge matters because of the ubiquity of diesel in modern life. As the fuel of transportation, the price rally will hit everyone, adding to inflationary pressures that are already running at a multidecade high. More than the cost of oil, rocketing diesel prices should be the main worry of central banks.
Ever before the war, diesel inventories had fallen to perilously low levels, particularly in the US and the European oil hub of Antwerp, Rotterdam and Amsterdam . In the US, diesel stocks fell last week to their lowest seasonal level in 16 years. In the ARA region, they are at a 14-year seasonal low.
The situation is made worse because Europe doesn’t just import finished diesel from Russia, but also semiprocessed oil that it further refines to make diesel. The lack of that feedstock, including vacuum gas-oil and straight run fuel-oil, is forcing some refiners to cut supplies. Both Shell and OMV have started to restrict their wholesale supplies. OilX, a consultant, has told clients it sees “a real risk of physical shortages of diesel in Europe”.