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Record diesel prices put pressure on European drivers and US deliveries

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A prolonged run-up in diesel prices challenges Wall Street’s bets on slowing inflation.

A global shortage of fuel, the workhorse of much of the global economy, is straining industries from trucking to agriculture and adding to pressure on consumers from rising fuel prices. energy. Europe, dependent on imports of Russian diesel which are set to collapse due to sanctions, is particularly vulnerable.

Motorists and businesses are feeling the pinch. In the United States, national average retail diesel prices hit a record high for a 15th straight day on Friday, hitting $5.56 a gallon, according to AAA. They jumped 56% in 2022, outpacing gains in the benchmark crude oil price. Retail prices for unleaded gasoline rose 35% to a national average of $4.43 per gallon.

In the United States, diesel is primarily used in trucks, which means higher prices increase shipping and delivery costs. Distillate inventories, which also include fuel oil, recently fell to their lowest level in 17 years amid weaker refining activity and higher demand at home and abroad, according to the United States Energy Information Administration. Supply is particularly tight along the East Coast, where stocks have fallen to their lowest level since at least 1990.

In Europe, where diesel cars make up a larger share of the car fleet, wholesale market prices have jumped 88% over the past year. Fuel availability is likely to deteriorate as sanctions on Russia tighten, exposing a rift in the region’s energy configuration.

Over the past few decades, governments have pushed drivers to adopt diesel cars, but failed to modernize the refinery industry so that it can produce the fuel in greater quantities. That meant buying more diesel from Russia, the energy superstore on Europe’s doorstep.

Helge Ippendorf, managing director of Via Logistik GmbH, a company based near the German city of Cologne that transports works of art, traffic safety materials and other goods, pays 4,000 euros, the equivalent of 4,150 $, per week for diesel, 80% more than a year ago. He does not remember such a jump in fuel prices since the oil shocks of the 1970s.

No other impact in my entire career and I started my own company in 1981 has been as massive as the current situation, he said.

A terminal of Valero Energy, one of the refining companies that has benefited from rising fuel prices. Photo: Luke Sharrett/Bloomberg News

Rising energy prices are a major contributing factor to the persistence of inflation, which has caused sharp declines in stock and bond markets. The S&P 500 fell 1.6% on Wednesday after a US consumer price gauge came in above Wall Street expectations.

The winners are the oil refiners, who convert the crude into usable fuels and enjoy rare profitability. Shares of Valero Energy Corp. VLO 3.56% and Marathon Petroleum Corp. MPC 3.39%, two of the largest U.S. refining companies, have gained 66% and 50% this year, making them the second and tenth best performers in the S&P 500, respectively.

Global inventories of refined petroleum products, including diesel, have fallen to extremely low levels, the International Energy Agency said on Thursday. Shortages are beginning to curb mobility in several African countries, Yemen and Sri Lanka. Kerosene is running out of fuel in Mexico, according to the intergovernmental organization.

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The diesel crisis is another result of the stop-start trajectory of Western economies since the start of the pandemic. When the United States and Europe went into hibernation in 2020, energy demand plummeted. Several struggling refineries, including the Gunvor Groups plant in Belgium and Shell PLCs in Convent, Louisiana, have shut down.

These shutdowns limit refiners’ ability to ramp up production now that demand thaws as cars get back on the road and planes take to the skies. The problem is more acute in diesel than in gasoline because diesel and jet fuel are produced from the same barrel of crude oil. When refiners started spitting jet fuel to meet airline demand last year, diesel production plummeted and supplies plummeted.

The war in Ukraine makes matters worse. Daily Russian exports of petroleum products have fallen by 400,000 barrels this year because some companies are fleeing Russian energy, according to analysts at Bank of America.

China has excess refining capacity. But lower petroleum product export quotas have cut China’s gasoline, jet fuel and diesel exports by 400,000 barrels a day since 2020, analysts added.

Western refiner profit margins have soared as traders try to encourage the industry to increase production. Executives on recent earnings calls said they were running full steam ahead and, in some cases, seeking to maximize production by postponing maintenance.

I don’t see any significant loosening in the system in the United States, said Gary Cunningham, director of Tradition Energy.

In Europe, diesel imports from Russia are expected to fall from May 15, when sanctions that hamper business trading companies can do with the state-aligned Rosneft Oil Co. come into effect. A complete embargo on Russian oil imports into the European Union is the subject of difficult negotiations.

East Germany is at risk, said Koen Wessels, senior partner for petroleum products at Energy Aspects. The region’s largest refinery, Schwedt, is majority-owned by Rosneft and is designed to run on imported Russian oil through the Druzhba pipeline. Production is expected to drop as the facility stops using Russian crude. Although some crude from non-Russian producers is expected to arrive via the Polish port of Gdansk, there is no pipeline that can reliably supply the refinery with crude from western Germany in the event of a shortage. .

Mr Wessels said Europe could be drawn into bidding wars with other economies to import diesel from producers such as India and Saudi Arabia.

One industry feeling the heat is agriculture, which relies on diesel to power tractors and dry crops, and also faces a historic spike in fertilizer prices. Jack Watts, an official with the UK’s National Farmers Union, said some suppliers had told farms they could order diesel but would only be offered a price once the fuel was delivered.

In many cases, farmers have ordered diesel but have no idea what they will pay for it, he said. We have never seen such concern over price and availability.

Write to Joe Wallace at [email protected]

Copyright 2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8

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