Europe is expected to have a severe diesel shortage this winter

Northwest Europe is expected to welcome a dangerous winter with historically low amounts of diesel, a fuel that powers large parts of the economy, as noted by the Bloomberg agency.

Inventories of motor diesel, heating oil and other diesel-type fuels in the region are set to shrink in November to the lowest level since early 2011, according to Wood Mackenzie. This means there is a smaller-than-usual supply “cushion” as Europe prepares for a potentially severe winter energy crisis.

“We expect inventories to decline at a seasonal rate, but we are starting from this very low base,” said James Burleigh, the firm’s principal analyst for European oil markets, on why November inventories are expected to be so low. “On the demand side, we have the usual seasonal increase.”

Diesel is vital for cars and trucks in Europe, where its use has historically been economically encouraged. Such fuels are also consumed by ships and used by the construction and manufacturing industries. Inventories in independent warehouses in the Amsterdam-Rotterdam-Antwerp oil trading hub are at their lowest level for the time of year since at least 2008, according to data from Insights Global.

Physical deficiency

Europe has a structural shortage of diesel fuel, receiving regular shipments from abroad. This physical shortage could become a bigger problem early next year when the EU’s ban on seaborne imports from Russia, currently the continent’s biggest external supplier, comes into effect.

This is just one part of a wider energy crisis hitting Europe after Russia invaded Ukraine, sending gas and electricity prices skyrocketing and reigniting inflation.

Even now, at a time of year when Europe’s stockpiles typically rise, there are signs of supply tightening. Oil refiner OMV in Germany reported shortages of heating oil and diesel. Austria, Switzerland and Hungary also said they would release oil from their stockpiles.

Low water levels in the Rhine River – an important river for transporting fuel – add to the situation. When the waters are shallow, cargo ships are limited in how much they can load. This makes it difficult to transport fuel.

Part of the problem with stockpiling is that there is no incentive from the market. Fuel for delivery during the winter months is currently priced at a discount to the August diesel contract. This structure, known as backwardation, signals a tight market and discourages traders from filling warehouses with fuel.

Recently, that structure has begun to “fade,” due to a combination of factors – including Russian barrels still finding their way to Europe – economic data and recession fears, according to industry analysts. Nevertheless, compared to historical normalities, this structure remains strong.