The diesel market in Europe is flashing signs of tightness as refinery halts and Red Sea disruption squeeze supplies of a fuel that helps to power the continent’s economy.

The market has been tight for a while, pressured by sanctions cutting off seaborne imports from Russia, the closure of European plants and refiners’ output of products slightly changing — partly in response to OPEC+ supply curbs. Now, traders are facing seasonal plant maintenance and attacks on Russian energy facilities as well as Red Sea disruption that has caused some freight rates to soar.

Diesel’s premium over crude has jumped to the highest for the time of year since at least 2012. As well as being an inflation booster, the situation also puts pressure on vital economic sectors such as trucking, farming and construction. Speculators have also become more bullish.

Diesel for delivery this month is also much more expensive than for later in the year, a structure known as backwardation that typically signals tightness.

“We expect to see a fall in northwest Europe diesel/gasoil stocks over the next two months,” said Emma Howsham, an analyst at Wood Mackenzie Ltd. She cited spring refinery maintenance, as well as “tight supply from key export hubs, and the Red Sea-Suez Canal disruption impact on flows into Europe.”

Diesel is the most important fuel used across the continent. Demand for diesel-type fuel in OECD Europe totaled more than 6 million barrels a day in 2021 and 2022, far outpacing other petroleum products like gasoline, according to the International Energy Agency.

Relatively low imports are contributing to the supply problem. Overall shipments of diesel-type fuel into the European Union and UK in January were below both month-earlier and year-earlier levels, according to data from analytics firm Vortexa Ltd. compiled by Bloomberg.

Still, barrels from India and the Middle East continue to arrive, with many shipments going around South Africa’s Cape of Good Hope to avoid attacks by Houthi militants in the Red Sea, adding to voyage time and costs. Other suppliers, like the US and Turkey, also continue to send shipments.

Maintenance Impact

Plant maintenance is also keeping a lid on diesel supplies. Work on crude distillation units — the beating heart of an oil refinery — in Europe is reported to total 440,000 barrels a day this quarter, Howsham said. While that’s 110,000 barrels lower than last year, the lost output is still greater than if the region’s largest refinery were to suddenly shut down.

Arguably the biggest wildcard, however, is the threat of more drone attacks by Ukraine on Russian facilities. Despite Western sanctions, Russia still exports millions of barrels of diesel-type fuel, and any disruption to those flows will ripple across the global market.

Woodmac’s expectation for gasoil and diesel stockpiles to fall this month and next chimes with historical data for the EU and UK from the Joint Organisations Data Initiative.

That expected drop is predicted to take place despite Woodmac forecasting demand this quarter to fall roughly 5% from a year earlier in northwest Europe. After that, the consultancy expects inventories to recover.