Stocks fell this morning as oil surged amid significant upheaval within the industry. A crucial Black Sea oil terminal was damaged in a storm last night, and according to Russian authorities, it could be weeks before it’s fully functional again. This pushed oil higher alongside an unexpectedly strong West Texas Intermediate (WTI) crude oil draw, which saw crude stocks drop by 4.28 million barrels (vs. a +25,000 barrel estimate) over the last week.
This confirms that, despite soaring oil costs, demand for WTI crude – the US benchmark – remains red hot. What’s more, inventories could be nearing dangerously low levels in the West. And it might only get worse as the US mulls over new sanctions against Russia.
“Russia is the largest supplier, the share of Russian energy resources on global markets stands at around 40%. Obviously, oil and gas markets would collapse without Russian hydrocarbons in the event that sanctions were imposed,” said Russian Deputy Prime Minister Alexander Novak.
Investors have been fixated on gas prices over the last month due to the war in Ukraine, and for good reason. Increased gas costs will only make the inflation situation worse. But beneath the surface, there’s a far bigger (and more immediate) problem taking form:
The world’s running out of diesel.
Leaders from the world’s top commodity trading firms spoke at the FT Commodities Global Summit in Switzerland yesterday. Many of them warned that not only were diesel stocks low in Europe but that a global shortage has already taken hold.
“The thing that everybody’s concerned about will be diesel supplies. Europe imports about half of its diesel from Russia and about half of its diesel from the Middle East,” said Vitol chief Russell Hardy.
“That systemic shortfall of diesel is there.”
Torbjorn Tornqvist, founder of the Gunvor Group, echoed Hardy’s comments.
“Diesel is not just a European problem; this is a global problem. It really is,” he said.
Tornqvist then went on to explain that European gas (not diesel) markets were failing to function properly, too, due to banks demanding larger and larger sums of cash from traders for hedge positions.
“I think it’s broken. It really is,” he added.
“I never thought that somebody could say ‘ah, gas has fallen below 100 per megawatt-hours is really cheap.’”
Increased capital requirements have made an already “tight” European gas market even more so. Hardy said that in order to move 1 megawatt-hour of liquefied natural gas priced at €97, traders now need to provide €80 in cash. This restriction has “paralyzed” the spot gas market according to Tornqvist.
But the most concerning comments from the FT Commodities Global Summit were undoubtedly about diesel, not gas.
“The diesel market is extremely tight. It’s going to get tighter and will probably lead into stockouts,” said Trafigura CEO Jeremy Weir. A probable “stockout” means that fuel stations in the West will soon run out of diesel completely.
With no diesel, supply chains would grind to a complete stop. And it would likely coincide with a massive increase in the cost of gas, making gas-capable vehicles far more expensive to operate.
So, despite oil’s already massive run-up through March, the truth is that the next climb in prices may only be getting started. Supply shortages – stemming from Russian sanctions, a Black Sea terminal disruption, and a strong WTI crude draw – are set to intensify heading into April, which should only complicate the Fed’s fight with inflation further in the coming months.