Diesel prices hit record highs. It's the drought

05.11.2018 10:31|Marcin Lipka

“Drivers have been unlucky recently. The risks associated with the sanctions imposed on Iran have raised oil prices above the limit of $85 per barrel. The fear of global oil supply has slightly decreased and prices have fallen, but local problems have arisen. One of them is drought in Europe and the Rhine river being at a record low level,” explains Marcin Lipka, Conotoxia Senior Analyst.

Oil prices have already fallen by 15 per cent in a month and oscillate at a level slightly exceeding 70 dollars per barrel. However, in Poland and other EU countries, fuel prices are not falling at all, and in case of diesel they are even rising. Why are drivers being forced to pay the highest price for diesel in the last 4 years?

Problems in refineries

The turn of the summer into autumn was very unfavourable when it comes to the operating capacities of European refineries. This applies especially to German plants. At the beginning of September, there was an explosion in the Bavarian refinery. There is a risk that it may not return to full capacity even by the middle of next year.

Other refineries had planned shutdowns, but their cumulative capacity was much higher than usual. In mid-September, the production shortfall at German refineries was at times 500,000 barrels per day (b/d) and was kept at the level of over 300,000 barrels per day until mid-October. A year ago, in the same period, shutdowns did not exceed 100,000 b/d, according to Bloomberg data.

 

Drought disrupts logistics

In the second half of October, the refinery's operating capacity was compounded by a drought. This made the inland waterway transport in Germany very difficult. In case of fuels, this was particularly true for the Rhine. Its record low level resulted in moments when it was not possible to transport fuels from Dutch or Belgian refineries to warehouses in Germany and Switzerland.

The cost of delivering fuel (mainly diesel) to these regions has risen significantly, which is perfectly illustrated by the EIA publication "Low Rhine River water levels disrupt petroleum product shipments to parts of Europe" from the end of October. Due to the crisis situation in both Germany and Switzerland, strategic fuel stocks have also been released.

Shortages on the diesel market in Germany cause price increases for this fuel practically across the whole of Europe. In Germany, the average retail diesel price, according to data from the European Commission on 2nd November, rose to the level of EUR 1.42 per litre. This is the highest level in 5 years. According to the European Commission, in Poland, the price of diesel is at its highest level in four years and stands at EUR 1.20 per litre.

Diesel will become cheaper

Diesel oil prices in Poland are likely to remain in the range of PLN 5.20-5.30 per litre for the next two or three weeks. Later, however, the relationship between crude oil prices and fuels should return to normal as the situation in Germany stabilises. Currently, the Rhine level is slightly rising and the shutdown in refineries is coming to an end. In the scenario of no increase in oil prices, diesel may return to about PLN 5 per litre already at the turn of November and December.


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