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Europe's diesel crisis will only get worse

Global diesel prices hit their highest in nearly three months as traders fear Houthi attacks on Red Sea shipping will raise costs for consumers and disrupt crucial supplies from Asia to Europe.
Diesel futures, the global benchmark, have risen 15% since mid-December, to $845 a tonne, reflecting growing investor concerns that Europe will be crushed by supply chain problems in the coming months.
The continent, one of the world's biggest buyers of refined oil products, has relied on imports from Asia and the United States over the past year after the EU banned the use of Russian diesel in the bloc.
But analysts warn that refinery maintenance in the United States will further reduce supplies across the Atlantic and raise the price further.
“This will leave Europe more dependent on barrels east of Suez, which is why shipping disruptions in the Red Sea will have a huge effect,” said Natalia Losada, a petroleum products analyst at Energy Aspects, a research group .
Rising prices could further test the resilience of the European economy.
Diesel is the most widely used fuel in the region, used extensively in freight and aviation, as well as for heating many homes.
The continent typically relied on Russian imports, but these were banned by the EU after the latter's invasion of Ukraine.
The Middle East initially took over, accounting for about 60% of Europe's diesel last year.
After the war in Gaza, that percentage dropped to about a third, according to data from S&P Global Commodity Insights.
“The prospect of more expensive diesel compounds economic challenges, contributing to a growing cost of living crisis,” said James Noel-Beswick, distillates trading analyst at Sparta Commodities.
Attacks by Houthi rebels have further changed traders' calculations, as ships are forced to bypass the main transit route from Singapore to Rotterdam via the Red Sea, and bypass the southern African coast.
Diesel futures prices remain far from the $1,600-a-tonne level following Russia's invasion of Ukraine, but have risen partly to pay for the extra 6,000 miles and two weeks of shipping costs.
Benedict George, chief analyst of diesel prices in Europe at Argus Media, said: “Prices are slowly adjusting to incentivize traders to find more expensive solutions to ensure supply reaches Europe [such as] accepting huge insurance costs , go all the way around the Cape of Good Hope or locate different sources of diesel for Europe.” “The price movement is gradual because it is not yet clear how long this situation will persist,” he added.
In recent weeks, alternative supplies from the United States have helped Europe cover the deficit, as local refiners doubled shipments to 10 million barrels in January, from 4 million barrels in November.
But many U.S.
Gulf Coast refineries are slashing production as they upgrade their facilities, and analysts say there will be less surplus diesel available for Europe.
Losada estimates that production capacity will decline by a tenth, or 1 million barrels, in January and February.
That compares with the average of 100,000 per day that were offline due to maintenance work in December, and represents about a tenth of total U.S.
refining capacity of about 10 million barrels per day.
The turbulence in the Red Sea has coincided with a decline in supplies in the crucial Amsterdam-Rotterdam-Antwerp region, known as the ARA, making Europe even more vulnerable to a supply crunch as its refineries undergo maintenance.
Europe has built up its diesel supplies following Russia's invasion of Ukraine, with shares at the ARA hub hitting the bottom of their five-year range, according to Sparta Commodities, a market data provider.
Refining capacity has also declined in recent years as policymakers have sought to ease the shift to greener energy sources, and demand has fallen as customers shift to electric vehicles.
But David Martin, senior oil analyst at the International Energy Agency, said OECD governments have enough emergency supplies to counter any supply crisis.
“I would say that diesel markets and OECD governments are well prepared,” he said.
However, analysts fear that global supplies of refined products to Europe could be further tested by instability in the Middle East and Ukraine.
JPMorgan warned on Tuesday that Ukrainian drone attacks on Russian energy infrastructure – which have increased this year – pose a “new, less appreciated, but potentially more damaging threat” to global oil balances than shipping disruptions in Red Sea.
“While Europe no longer buys oil products from Russia, diesel is a global market and if Russia produced and exported less, it would impact global balances,” said Natasha Kaneva, the bank's head of global commodities .
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