As a diesel crisis spreads in the West, could SA be next?


As a diesel supply crisis hits the US and builds in Europe, fuel prices in South Africa will reach a record high this week, stoking inflationary pressures already weighing on critical industries and cash-strapped consumers.

This week, as a diesel shortage gripped the US economy with only 25 days of reserves – the lowest levels since 2008 – some suppliers are starting to scramble.

As reported by Bloomberg, a major US fuel supplier, Mansfield Energy, wrote in a note to its clients that "conditions are rapidly devolving" and "at times, carriers have to visit multiple terminals to find supply, which delays deliveries and strains local trucking capacity".

The diesel supply shortage is also spreading across Europe, with demand increasing as winter sets in. However, the immediate need in North America has seen some Europe-bound ships carrying diesel and jet fuel rerouting to the US East Coast.

In South Africa, prices are climbing too. On Wednesday this week, the diesel price will rise by R1.43 a litre. This will push the Gauteng price of diesel to R25.49 a litre - a new record high. A year ago, Gauteng's diesel price stood at around R17.20 per litre.

Peter Morgan, director of the Liquid Fuels Wholesalers Association, said the diesel price trajectory is concerning.

Mining companies have already seen rising diesel and other input costs weighing on profits. The agricultural industry will also feel the weight of rising diesel prices as fuel accounts for 13% of planting costs, said Wandile Sihlobo, chief economist at the Agricultural Business Chamber of South Africa.

"Fuel is a big component of the cost, and the guys are still at the start of the planting season. It does put a squeeze on profitability and puts financial strain on some [farmers]," he said.

Linda Giesecke, Manager of Global Fuels at ESAI Energy, a market research and forecasting firm, said the diesel problem is intensifying.

"While not a new factor, the EU ban on Russian diesel is edging ever closer. Russian exports to Europe are reportedly lower this month, with the real shift coming ahead of the February ban."

According to Matt Smith, a lead oil analyst at commodity markets intelligence company Kpler, the diesel market remains tight with winter looming and sanctions on Russia fast approaching. "This tightness can be seen in low inventories in both Europe and the US, while there is the added kicker in Europe as consumers look to pivot to using diesel this winter for power generation as natural gas prices remain elevated," he said.

Adding to the pressure on diesel prices are recent strikes at French refineries.

"The lack of French supply has already cut into ARA [Amsterdam-Rotterdam-Antwerp, a refining and storage hub] stocks, suggesting that stocks in other locations are falling too. This has further tightened the European diesel market. Meanwhile, US diesel inventories not only failed to build this summer but are now falling, dropping by 11 million barrels since mid-September, according to government statistics, and are about 15% below where they should be.

More concerning is that this lack of inventory buffer is occurring on the East Coast, where stocks are about 35% lower than usual heading into the winter," Giesecke said.

Important to note, however, is that China has issued further product export quotas for the fourth quarter – adding 15 million tonnes to its 2022 export quota for oil products – which should soon see more product flowing into the global market, although prices are still expected to rise."

Unfortunately, we are price takers with no means to influence the market price," said Avhapfani Tshifularo, executive director of the South African Petroleum Industry Association (Sapia).

Even though delayed diesel shipments prevented Eskom from running emergency generators late last month, inadequate diesel supply is not a concern for the country generally."

Despite [a] high anticipated diesel price, we expect stable supply in the local market," Tshifularo said, noting high prices will not affect the importation of diesel nor the local manufacturing of diesel at the Secunda and Natref refineries as refinery margins are "excellent" for refiners currently.

The industry, and, in turn, the economy, would have reaped benefits from this were South Africa not importing 80% of its fuel requirements following the closure of three refineries, one of which is expected to restart soon.

More from our team

Get in touch with an ESAI expert to learn more.