European economies face the risk of a shortage of diesel, the preferred fuel for heavy industry, as sanctions on Russian energy threaten to disrupt imports while supply from elsewhere remains limited.
Russia is Europe's largest supplier of diesel and related fuels.
It sends over three quarters of a million barrels per day for use in European heavy machinery, transportation, farming, fishing and for power and heating.
The surge in diesel prices in Europe has already had an impact on industry by pushing up fuel and transportation costs, which are passed on to consumers through higher costs across the economy.
"Governments have a very clear understanding that there is a clear link between diesel and GDP, because almost everything that goes into and out of a factory goes using diesel," John Cooper director general of Fuels Europe, a division of the European Petroleum Refiners Association.
The US has banned Russian oil imports in response to Russia's invasion of Ukraine.
Britain said it will phase out the import of Russian oil and oil products by the end of 2022 and the European Union is assessing a ban.
Meanwhile, several oil companies have pulled back from buying from Russia because of a fear of public opposition, difficulties in securing financing, insurance and a reluctance of ship owners to load from Russian ports.
Around 760,000 barrels per day of Russian gasoil and diesel flows to Europe would be at risk, needing replacement, if European buyers shun these volumes, according to energy consultancy FGE.
It will be difficult for European refiners to increase output of middle distillates, which include diesel and heating oil, Cooper said, so Europe should find other sources of diesel, probably at higher prices.
MOST EXPOSED COUNTRIES
Russia accounts for around half of Europe's diesel imports, Russell Hardy and Torbjorn Tornqvist, chief executives of Vitoland Gunvor respectively, told the FT Commodities Global Summit this week.
Saudi Arabia, the second biggest supplier, accounted for only 12% of the imports in 2021, according to FGE.
France imported 25 million tonnes of diesel in 2020, a quarter of which was Russian, according to the French Association of Petroleum Industry (UFIP).
And France may struggle to find alternative supplies. "We estimate that 10 to 15% can be found elsewhere," Olivier Kntois, the head of UFIP, said this month.
In the UK, Russia supplied 18% of the diesel in 2020, official figures show.
A spokesperson for UK Petroleum Industry Association (UKPIA) told Reuters fuel suppliers are working with the government to deliver the fuels the UK needs "while adjusting long-term supply routes to reduce reliance on Russian crude oil and oil products".
For Germany the situation seems to be more complicated as it has fewer options to reduce its deep reliance on Russian diesel, according to trading sources.
Germany relied on Russia for almost 30% of its diesel and gasoil imports in 2020, data from the EU statistics agency show.
Despite the decision by several companies to self sanction, the flow of Russian refined products continues into Germany, according to trading and industrial sources, and it is expected to stay the same in the absence of alternative supplies.
"There just isn't enough diesel around not to take [Russian diesel] at the moment," a trading source said.
"We see some people prefer non-Russian oil, but if there is no alternative, then they will take it," the source added.
GLOBAL DIESEL SHORTAGE
Global stocks of diesel and other middle distillates have fallen to the lowest seasonal level since 2008 due to refinery shutdowns during the start of the pandemic and a rise in demand since.
Unlike Europe, which is short of diesel, the Middle East usually has a surplus due to higher refinery runs, with yields largely in favour of diesel.
The net surplus is expected to surge to 1.33 million bpd this year, according to FGE. However, not all Middle Eastern products meet the low pollution standards required in European markets.
Middle Eastern producers export their products worldwide.
A more likely source of replacement barrels for Europe is the US, which will have a net surplus of 1.1 million bpd this year, according to FGE.
But increasing flows to Europe from the Middle East and the United States will take time, one trader said, adding that for this reason "for now things will have to stay the same".
Furthermore, increased diesel trade flows between the US and Europe could have knock-on effects elsewhere.
As European countries have more cash at their disposal, they could outbid Latin American countries, creating a shortage in Latin America, FGE analysts said.
"The diesel market is extremely tight and we're possibly heading to stock outs. Europe can probably afford to pay. The problem is what happens to Africa and Latin America," Trafigura CEO Jeremy Weir said this week.
"We're very concerned about the stock outs due to take place in Africa that heavily rely on diesel for power generation," Weir added.
The high diesel prices could also reduce demand among private car owners who account for consumption of 1 million bpd in Europe.
"Average diesel prices at the pumps in Europe are now more expensive than petrol. This is the first time in history. If the prices go higher, it could force private diesel car owners to reduce driving," said Cuney Kazokoglu, head of oil demand analysis at FGE.
With supply restricted, the price is rallying to a point that reduces demand, although predicting these heights remain unclear, analysts said.
Yet signs of demand destruction are already emerging.
"The price of fuel is extremely volatile at the moment and for some fishing vessels it is approaching the tipping point where it is not viable to embark on a fishing trip," Barrie Deas, CEO of the UK's National Federation of Fishermen's Organisations, told Reuters.
Higher fuel costs are also adding to problems in food supply chains stemming from disruptions to Black Sea grain and fertiliser exports.