Europe’s diesel supply-chain threatened by soaring freight costs

A surge in shipping costs due to turmoil in the Red Sea is pressuring Europe’s diesel supply-chain, contributing to a sharp jump in fuel prices.

Rates to hire large tankers to bring the fuel to northwest Europe from the Middle East jumped to $117,000 a day this week as attacks by Houthi militants on merchant vessels continue to disrupt the shipping market. That’s contributing to a rise in diesel margins — the price of the fuel relative to crude oil.

Europe is structurally short of diesel-type fuel and relies on imports. When freight costs increase, Europe’s fuel prices need to rise relative to other regions, in order to compensate for the added expense of hauling in barrels from far-flung suppliers.

The recent jump in shipping costs has helped push diesel margins in northwest Europe to the highest level since early December, according to figures from General Index. It has also contributed to a blowout in what’s known as the east-west spread: the price difference between diesel in Europe and Asia.

Even though diesel is fetching a higher price in Europe than Asia, more expensive freight means it’s not economical for exporters in the Middle Eastern Gulf and India to send cargoes to Europe, according to Eugene Lindell, head of refined products at consultancy FGE.

“We should not actually see large flows of diesel from the Persian Gulf and India to Europe at current east-west spreads,” he said. If those barrels can’t find homes in Europe, “they will head East.”

It’s worth noting that Europe’s diesel margin is also driven by other factors, such as refinery outages and economic activity. The region also draws in barrels from the US Gulf coast, and the cost of shipping across the Atlantic — albeit on smaller ships — hasn’t risen as sharply.