Can releasing more of Europe’s emergency reserves bring diesel prices down?
The EU says it is ready for collective action with the IEA on a fresh emergency release. Analysts say releasing diesel reserves could lower pump prices within days, but would offer only short-term relief.
Historically high diesel prices in the EU and growing concerns about a potential US diesel export ban have prompted calls for action in the bloc.
European Commission spokeswoman Anna-Kaisa Itkonen said on Friday that the bloc was ready to work with the International Energy Agency on the possible release of fuel reserves to bring down energy prices.
On Wednesday, the International Energy Agency confirmed that it could consider releasing more emergency oil stocks if supply disruptions worsen.
At the time of writing, the size of a potential release has not been confirmed, although France suggested releasing 50 million barrels of diesel — approximately 6.7 million tonnes — alongside 50 million barrels of crude oil from the International Energy Agency’s emergency stocks on Friday morning, according to EU diplomats.
George Shaw, senior insight analyst for distillate markets at Kpler, sees the proposed 50-million-barrel diesel release as substantial.
According to Kpler, the EU and UK imported 24.25 million barrels of diesel from outside the region in September, meaning the proposed release would amount to roughly twice that monthly volume.
Analysts agree that the impact on prices would depend on both the volume released and how quickly it reaches the market.
Alan Gelder, senior vice-president for refining, chemicals and oil markets at Wood Mackenzie, said: "A major release of diesel reserves could lower wholesale prices by US$20–30/bbl, which equates to about €0.10–0.15 per litre at the pump," adding that motorists could see prices fall within a few days. Shaw said significant market price changes typically take one to two weeks to reach the pump.
However, this is a short-term remedy, Gelder added. "Any further release only buys time, as global diesel supply is still below global diesel demand, so we continue to draw on inventories and are vulnerable to the export policies of others (such as the US)," Gelder said.
The chart below shows overall emergency oil stocks by country, including diesel reserves.
Diesel supply in Europe has been severely affected, partly because Russian refineries are not fully operational following drone strikes. This is compounded by reduced exports of refined products from the Middle East and lower exports from Asia in response to the US-Iran conflict, which is restricting crude exports from the Middle East.
On the size of European countries’ strategic reserves, Gelder said that "major countries have 70 to 100 days of cover", adding that the requirement is to hold stocks equivalent to approximately 60 days of inland consumption or 90 days of imports, whichever is greater. "We hence have at least two months of cover if there is no supply and European refineries continue to operate."
Petrol and diesel have remained particularly expensive in Europe not only because of rising international crude oil prices but also because of the soaring cost and limited availability of refining capacity.
European refineries have been running close to full capacity, and there is little room to increase production.
According to Gelder, refinery capacity in use across European OECD members "is at over 80% (measured by crude intake against nameplate capacity), processing about 11 million b/d of crude," meaning that production is close to maximum levels.
These constraints leave Europe reliant on diesel imports. Releasing refined products from EU countries’ strategic reserves could therefore be the fastest way to affect prices.
However, replenishing those reserves would take time. “Releasing strategic stocks would mean that you are eroding an important buffer,” Shaw said, warning that the duration of the crisis remained uncertain. He said rebuilding stocks would depend on increased production and exports from the Middle East.
The EU has been under pressure from the United States to release some of its strategic oil reserves “immediately” to help lower global diesel prices.
On Friday, Brussels criticised the threatened US ban on diesel exports, warning that it would undermine trust in Washington as a reliable partner. "We fully reject any ban on diesel."
A fresh release would follow the agreement reached by IEA member countries in March to make 400 million barrels of emergency oil stocks available to the market, with each country following its own release timetable.
Shaw said Middle Eastern diesel exports in September were still more than 50% below their level a year earlier.
According to Gelder, "for diesel prices to fall sustainably, the global refining system needs to ease, which requires a resolution of the US-Iran conflict to enable higher production from Middle East exporting countries, along with greater exports from other suppliers, such as Russia".
Pressure on diesel supplies could also ease if high energy prices and high government bond yields trigger a global economic slowdown, reducing demand for the fuel.
