Traders warn of looming global diesel shortage

Global markets face a squeeze on diesel because of sanctions on Russia, with Europe most at risk of a “systemic” shortage that could lead to fuel rationing, the world’s top trading groups have warned.

The heads of three of the largest commodity traders — Vitol, Gunvor and Trafigura — estimated that as much as 3mn barrels of oil and its products a day could be lost from Russia as a result of sanctions, following the country’s invasion of Ukraine. The corporate leaders were speaking at the FT Commodities Global Summit in Lausanne, Switzerland.

“Europe imports about half of its diesel from Russia and about half of its diesel from the Middle East,” said Russell Hardy, chief of Switzerland-based oil trader Vitol. “That systemic shortfall of diesel is there.”

These Russian imports account for roughly 15 per cent of Europe’s diesel consumption, while crude oil from Russia is also processed by refineries on the continent.

Hardy said the shift to more diesel consumption over petrol in Europe had created shortages of the fuel. He added that refineries could boost their diesel output in response to higher prices at the expense of other oil-derived products to shore up supply, but acknowledged that rationing was a possibility.

Torbjorn Tornqvist, co-founder and chair of Geneva-headquartered Gunvor Group, said: “Diesel is not just a European problem, this is a global problem. It really is.”

Amrita Sen, chief oil analyst at Energy Aspects, said “diesel is by far the worst affected” of the oil products because Europe imports close to 1mn barrels a day of Russian diesel and the world entered the conflict with near record low stocks of oil.

French oil major TotalEnergies said, unless it received instructions to the contrary from European governments, it would terminate its Russian diesel purchase contracts “as soon as possible and by the end of 2022 at the latest”. 

“TotalEnergies will import petroleum products from other continents, notably its share of gasoil produced by the Satorp refinery in Saudi Arabia,” the company said in a statement.

Jeremy Weir, chief executive of Singapore-based Trafigura, said that 2mn-2.5mn barrels of Russian oil production would go missing from the global market, split between crude and refined products. “The diesel market is extremely tight. It’s going to get tighter,” he added.

Tornqvist said that European gas markets were no longer functioning properly, as traders faced huge demands from banks for cash to cover hedging positions.

“I think it’s broken,” he said. “I never thought that somebody could say ‘ah, gas has fallen below 100 per megawatt hours [and that] is really cheap’.”

Europe’s largest energy traders last week called on governments and central banks to provide emergency liquidity support to keep gas and power markets functioning, as sharp price moves triggered by the Ukraine crisis have strained dealings in commodities.

Gas futures linked to TTF, Europe’s wholesale gas price, have whipsawed from about €80 a megawatt hour ahead of Russia’s invasion of Ukraine to more than €300 earlier this month, before sliding below €100 again this week. Two years ago, European gas prices were below €20 a megawatt hour.

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Commodity traders face soaring margin requirements, the percentage of a security’s price that banks demand traders hold in cash.

Hardy said participation in the spot market for gas had dwindled because the cost of trading had risen so high. To move a cargo equivalent to 1 megawatt hour of liquefied natural gas priced at €97, traders must provide €80 in cash, straining their capital requirements, he added.

Tornqvist said European utilities would struggle to fill gas storage for next winter given the “paralysed” state of the spot market for gas, unless policymakers stepped in to provide guarantees to protect buyers against price swings.