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COLUMN-UK diesel shortage shows need for caution on sanctions: Kemp

·3 min read

By John Kemp

LONDON, May 25 (Reuters) - Like the east coast of the United States, Britain was experiencing a severe shortage of distillate fuel oil even before Russia's invasion of Ukraine, which sanctions now threaten to make much worse.

UK diesel and gas oil inventories had fallen to 1.57 million tonnes by the end of February, down from 2.23 million at the same point a year earlier, and the lowest seasonal level since 2014/15 and before that 2008.

The country's passenger vehicle fleet is split between diesel and gasoline but long-distance freight transport, local delivery services, small businesses and construction all rely on diesel (https://tmsnrt.rs/38g7vju).

Distillate consumption has rebounded much faster than gasoline, reflecting the resurgence in business activity and commercial journeys compared with commuting and leisure.

Distillate use was down by just 2% in February from the same month before the pandemic, compared with a 12% decline for gasoline, according to data from the Department for Business, Energy and Industrial Strategy (BEIS).

Diesel and gas oil inventories had fallen by almost 30% over previous twelve months compared with only 8% for gasoline ("Energy trends: UK oil and oil products", BEIS, April 28).

As a result, the ratio of distillate stocks to consumption has fallen to its second-lowest level for decades, a sign of how tight inventories have become.

The shortage has pushed retail diesel prices to a premium of 13-14 pence per litre (8-9%) over gasoline, the highest since 2008 ("Weekly road fuel prices," BEIS, May 24).

High prices are intended to conserve inventories by discouraging consumption while incentivising more imports from abroad.

SANCTIONS

Britain relied on net imports to cover almost 40% of its distillate consumption in 2021. Russia was the single largest source, accounting for 33% of all distillate imports and 17% of total consumption.

Diesel imports from Russia can be substituted relatively easily from other sources since the volumes involved are not large on a global scale.

Britain has announced it will wind down Russian imports over the course of 2022 ("U.K. to phase out Russian oil imports", BEIS, March 8).

But there is not enough diesel and gas oil available from other sources for all European countries to make the same substitution at the same time.

Planned EU sanctions on Russian petroleum will need to include more generous treatment for distillates or stocks are likely to fall critically low across Europe, risking shortages at retail level.

The United States and Britain, both of which have already announced sanctions on Russian diesel, are therefore tacitly relying on the European Union to continue importing it to avoid sparking a worldwide crisis.

Related columns:

- U.S. diesel shortages lift refining margins to a record (Reuters, May 10)

- U.S. distillate stocks fall critically low (Reuters, May 5)

- Global diesel shortage pushes oil prices higher (Reuters, March 24)

- Depleted U.S. distillate stocks show supply chain pressure (Reuters, Feb. 4)

John Kemp is a Reuters market analyst. The views expressed are his own (Editing by David Evans)