Dataset of the month: European diesel prices falling but outlook remains uncertain

Diesel Prices

Diesel fuel costs are commonly thought to comprise around 30% of the cost base for road freight operations in developed economies, and as such, can be an important factor to consider when analysing rate movements in road freight. The relationship with diesel and wider energy markets means that price changes can come as the result of growing demand from an energy hungry economy, which in turn can then drive more demand in the road freight market, pushing prices even higher.

As shown in the Upply and Ti Quarterly European Road Freight Rate Index, both contract and spot rates have continued to rise sharply throughout 2022, with rising diesel prices being an important contributing factor.

Prices have skyrocketed since the start of the conflict in Ukraine in February 2022. Crude oil prices, a key cost component of diesel, rose dramatically during the opening weeks of the war, and have since remained elevated throughout 2022. The outbreak of war arrived during a period of already inflated crude oil prices, following the relatively sudden return of economic activity after the end of COVID related lockdown restrictions, with a recovery in road freight transport itself contributing significantly to rising demand. Crude oil refining capacity has been slow to respond to this rapid turnaround in demand, with capacity continuing to shrink well into 2022. While many countries in Europe have responded to the resulting price hikes by cutting fuel taxes, on the whole this has not been enough to bring the exceptionally high diesel prices back down to more “normal” pre-pandemic levels. The average of weekly EU diesel prices as reported by the EU commission grew by 12.2% between Q4-21 and Q1-22. The effects of the conflict on diesel prices further worsened into the second quarter of 2022, with the average diesel price rising a further 14.8% quarter-on-quarter.

Soaring diesel prices do appear have come to an end for now, however. The most recent data shows that for the EU, average weekly diesel prices in Q3 has fallen by 1.7% quarter-on-quarter. This represents at the very least a stabilization of prices, however the momentum at the end of quarter appears to be heading downwards.

Despite this, the outlook for diesel prices in Europe remains very uncertain. With recent escalations in the war, the EU is set to respond with a ban on Russian crude oil imports. The policy will bar oil barrels from entering the continent directly, while allowing the world market only to trade and refine Russian oil for sale in Europe if strict crude oil price caps on its purchase are implemented. According to the European Commission, in 2020, 29% of extra-EU crude oil originated from Russia, and so the country’s decision on whether or not to accept these price caps will have a large impact in the supply of diesel in Europe. Russia has thus far maintained that it will refuse to comply with the cap, and in this case, supply of diesel to Europe will be severely affected. This will likely apply significant upwards pressure to prices from December – when the restrictions are planned to begin.

Although supply remains tight and is expected to tighten, this does not necessarily mean diesel price rises are inevitable. On the other hand, the declining economic environment across Europe is expected to reduce aggregate demand for oil and apply downwards pressure on price of diesel a result. How these forces eventually balance out will be reflected in diesel prices, and these movements will not only reveal much information on the condition of the economy, but also will have important consequences for the future of road freight in Europe.

Tracking the developments diesel prices over the coming months will be crucial for gaining a complete understanding of the European road freight market. Ti’s Global Supply Chain Intelligence (GSCi) provides weekly diesel price data for 27 European countries alongside other major countries from around the world.

Source: Transport Intelligence, 30th September 2022