Houthi attacks on Red Sea have significantly disrupted the global oil markets, elevating security concerns and leading to increased shipping costs. These incidents have necessitated a reassessment of strategies for transporting oil, with notable implications for the global supply and pricing of diesel fuel.
Amidst these tensions, European markets are proactively seeking to mitigate risks by improving logistical strategies and exploring alternative sources for diesel supply. The vulnerability of diesel supplies is exacerbated by a reduction in imports and Europe's decreasing refining capacity due to its decarbonization efforts. Consequently, Europe's dependency on the Middle East for approximately 30% of its diesel needs introduces substantial risk, especially in light of Insights Global data indicating a diesel stock deficit of 277,000 barrels, or an 11.23% decrease from the five-year average as of February 1st. This situation underscores the critical need for Europe to adapt its energy strategies to maintain diesel supply stability.
In response to these challenges, there has been a significant uptick in Europe's imports of refined products from WoS and in particular, from the US. This shift is attributed to favorable refining margins in the US and Europe's strategic efforts to diversify energy sources. Data from December 2023 to January 2024 reveals a notable increase in diesel imports to Europe, reaching a six-month peak of 6.02 million mt. This 10.46% m-o-m rise underscores the strong demand in the face of logistical and maintenance challenges affecting both regions. The robust US exports, particularly of middle distillate products to Europe, represent an adaptive strategy to the disrupted supply chains, ensuring energy supply continuity despite the Red Sea tensions. However, the upcoming planned maintenance across several key refineries, including those in the Mid-west and California, suggests that the recent increase in flows to Europe may not sustain in the coming months. Consequently, there's increasing concern that European markets, already dealing with their logistical con-straints and maintenance schedules, may encounter even tighter supply margins.
Concurrently, diesel imports from the EoS to Europe have declined, with most shipments being rerouted around the Cape of Good Hope to avoid the Suez Canal, where transits of laden product tankers are currently about 30% below November levels and expected to continue at reduced levels. The strategic rerouting has not only significantly increased the voyage distance by approximately 70% compared to the shorter Suez route, but also led to a dramatic increase in shipping costs. Baltic Ex-change data highlights that the rate for the 65kt MEG to UKC route has risen almost 140% since the beginning of December and by 52.5% since early 2024. This increase reached a record high on January 29th, with a daily TCE of $105,394 per day, a 234.14% increase from the 2023 aver-age. Additionally, the attacks have contributed to a surge in global diesel prices, reaching a near three-month high, as concerns over increased costs and supply disruptions from Asia to Europe grow. Bloomberg re-ports a 12% increase in NWE's wholesale fuel prices to just over $116/bbl since the start of 2024.
Europe is expected to face tighter diesel supplies in the coming months, which may lead to higher time spreads and retail diesel prices, further challenging the European economy's resilience against rising energy costs.
Data Source: Intermodal