While the world has focused on banning Russian crude, Europe is also debating how to reduce its dependence on natural gas from Russia. What about transportation fuel? Russia accounted for almost 20% of Europe’s diesel imports, according to data from Eurostat. These imports accounted for 10–30% of total diesel supply for countries in Western Europe.
Multiple factors will impact supply and demand for diesel. On the supply side, European refineries could increase runs to replenish their inventories once spring turnaround maintenance is complete. As pandemic restrictions relax worldwide and travelling increases, diesel components might be diverted to meet increased jet fuel demand instead.
Favorable arbitrage will trigger an influx of potential supplies from the Middle East, South Asia, or the United States Gulf Coast/East Coast. Solomon’s Cost of Transportation Fuels (CTF) metric benchmarks a refiner’s “breakeven” cost to make a barrel of transportation fuel. CTF includes cost to purchase raw materials (such as crude and other feedstocks) plus total operating expense to upgrade those raw materials into finished transportation fuel. Refineries with lower CTF tend to be more competitive.
Figure 1 shows the average landed costs into Europe for refineries by region based on CTF data from Solomon’s 2020 Worldwide Fuels Refinery Performance Analysis (Fuels Study) plus published shipping costs:
South Asia refineries have the lowest CTF, making it more competitive compared to the Middle East and United States Gulf Coast/East Cost which are evenly matched. Due to their location, South Asia refiners incur higher shipping costs to Europe vs the Middle East and United States (where higher CTF is offset by lower shipping costs). On average, all these regions have similar landed costs. If economics are favorable to supply Europe, watch for refineries with low CTF and excess capacity in these regions to increase utilization to satisfy both domestic and export demand.
How can refineries meet their supply obligations in this new crisis? Solomon’s World Oil Refining Logistics and Demand (WORLD) Model® can be used to evaluate regional product demand and trade flows. Coupled with actual operating data from Solomon’s Fuels Study—representing up to 85% of the worldwide refining capacity—we can generate a rich and unique collection of operating data and insight. See how Solomon is helping refineries successfully improve energy efficiency, lower carbon emissions, and strategically understand their competitive cost to produce transportation fuels at www.SolomonInsight.com/Refining.