Alfonso: Hello, and welcome to "Driving Discussions Europe." In this series, we discuss the forces that affect road fields globally. "Driving Discussion" is brought to you by Argus Media, a leading independent provider of energy and commodity pricing information. European diesel demand has remained very weak for several months now, and as time passes by, more market participants start to see this weakness as structural. Along together with poor demand, European refinery landscape seems deteriorating with more incidents and shutdowns taking place. However, the weakness of the European diesel demand is not uniform, and there are different factors pulling demand apart between Western Europe versus Eastern Europe. My name is Alfonso Berrocal, VP for middle distillates and sustainable aviation fuels at Argus Media. And to analyze this topic, we have here today with us my colleagues, Johannes Guhlke, senior market reporter of Argus Media in Hamburg, and Ivan Kudinov, head of desk, Ukrainian Oil Products, Argus Media in Kiev. Hello, Johannes. Hi, Ivan, how are you?
Johannes: Hi, Alfonso. Hi, Ivan. Happy to be here.
Ivan: Hi, Alfonso. Hi, Johannes. Thanks for having me at this podcast.
Alfonso: Thank you, guys. Johannes, what is the current trend of diesel consumption in Germany, and what factors are driving it?
Johannes: Yeah, thanks for the question. So, the last four-year statistic we have is from 2023, which saw combined heating oil and road diesel consumption in Germany at around 45 million tons. The share of road diesel is about three-quarters, and over the past few years, road diesel consumption actually declined on average by 3.7% per year. As a quick heads up, in Germany, people strictly distinguish heating oil and diesel, so I will do the same going forward. So coming back to your question, one driving factor for the declining diesel consumption is the worsening performance of German manufacturing, and the second is the continued switch to EVs and biofuels.
Just to quickly remind our listeners why we even talk about German demand. In 2023, the German share in the overall European gas oil consumption was at 18%, which makes Germany Europe's biggest consumer of diesel. And just recently, the German Bundesbank, so the German Fed, if you will, said that the GDP in the fourth quarter of 2024 dipped into a slight recession, and they revised the expected growth for the first quarter this year down from 1.1% to 0.2%. So I have mentioned that one key driver for this downturn in economic activity is linked to the poor performance of Germany's manufacturing industry, which is in turn very much linked to the Ukraine crisis, because before this the domestic industry has been relying on cheap Russian gas for decades. But now as we are entering the third year of the war, we are still seeing comparatively high natural gas costs of around €50 per megawatt hour. This is about five times higher, actually, than it was five years ago. So, you can imagine the effect this has on production costs and margins, right?
Against this background, manufacturers and also the chemical industry are continuing to move their production away from Germany, or at least downscale the locations they operate here. This moving away and reducing of production is, in turn, directly weighing, of course, on diesel consumption as it lowers truck mileage. The so-called truck toll driving activity index, which monitors how many trucks are moving goods on German motorways, fell drastically at the beginning of 2022 and continues its downturn before stabilizing last year, but it still remains below pre-pandemic levels. Naturally, now there is a lot of discussion in Germany on how to best navigate out of this difficult situation, right? But maybe more on that later.
Alfonso: Thanks, Johannes. So the picture is a little bit grey. But you mentioned the EVs and biofuels. Do you have any statistics to put in context what is the growth of EVs and biofuels in Germany?
Johannes: While the shrinking industry sector in Germany is weighing on domestic diesel demand, consumption is further pushed down by the increasing shift towards electric vehicles, plug-in hybrids, and biofuels. Between 2020 and 2024, the combined share of EVs and plug-ins of the overall carpool rose from 0.5% to 5%. So it actually increased tenfold within four years. And also the use of biofuels and HVO is at least theoretically going to further increase in Germany. This is mainly driven by the German emission mandate, the so-called GHG quota or greenhouse gas reduction quota, which is gradually rising from 10.5% today to 25% in 2030.
Alfonso: Okay. Thank you, Johannes, for giving us this mixed picture of the German market, which is very useful to compare it with what is happening in the East. And for this purpose, we have here, Ivan, hi, Ivan, it is now three years from the Russian invasion of Ukraine. What has it been the impact in the Ukrainian market?
Ivan: Well, after the sharp decline in 2022, the Ukrainian oil products market has been steadily recovering despite the ongoing war. It's worth mentioning that most oil products that are being consumed in Ukraine are imported, so securing such supplies is vital for our country. Before the war, we mainly relied on imports from Belarus and Russia, but following the Russian invasion, our market, like the overall European market, made a monumental shift towards diversification. And diesel is the best example of such a shift. Imports covered more than 80% of Ukrainian usual diesel consumption, but this dependency increased with the war because not all domestic producers can process crude and condensate now. We estimated that total diesel consumption in Ukraine was around 7 million tons in 2024, which is about the same as in 2023. This is two and a half times less than in neighboring Poland and much lower than in Germany. But before the invasion, Ukrainian consumption was around 8 million tons. Nevertheless, it's quite a substantial amount.
Diesel imports last year accounted for 6.5 million tons, slightly increasing compared to the 2023. We see demand for imported products not only from commercial, civil sector of economy, but also from the military sector as well. Unfortunately, it's hard for the war-torn country to maintain consumption of oil products, especially during the hostilities. I want to remind you that in 2022, Ukrainian GDP constructed by more than 29%. It rebounded later by 5.3% in 2023 and by almost 4% last year. But anyway, you can imagine the extent of damage for our country and for our economy. So returning to the supply side, strong reliance on imports means that Ukraine plays a significant role in diesel flow across Eastern Europe and Western Black Sea region.
Alfonso: Thank you, Ivan. Could you please describe what are those flows that you just mentioned to supply diesel into Ukraine?
Ivan: It goes without saying that neighboring European countries such as Romania and Poland are key suppliers as they leverage their location and, of course, port infrastructure and advanced oil refining sector. Take Romania, for example. This country exported to Ukraine nearly 2 million tons of diesel. However, almost all diesel supply to Ukraine was not Romanian origin. It was delivered to Ukraine from the port of Constanța, from the Med region, east of the Suez as well. Constanța now is the major hub for diesel supplies to Ukraine. Seabourn diesel arrivals to Constanța were more than doubled to almost 4.2 million tons in 2024. This significant increase over the past two years was driven largely by strong demand from the Ukrainian market. And the shift in diesel supply and change across Europe after the sanction and increased demand from the Ukrainian market has also changed the market dynamics in East Med region as well.
Just quickly to remind you that Turkey being the primary market for Russian diesel now, so Turkish refineries redirected its domestically produced product to European ports, especially to the Romanian ports of Constanța to meet the demand from Romanian market and from the Ukrainian market as well. Diesel from Constanța is being supplied to Ukraine mainly on barges and barges shipped from Constanța to the Ukrainian shallow water ports on the Danube were traded last year at premiums of 25, 30 on FOB basis to SIF Med assessment. This in average three times slower than in 2022 when the Ukrainian market was turbulent.
Another significant seabourn supplier is Greece, which has more than doubled its direct diesel export to our country to 1.3 million tons. Greek producers consider Ukraine as the key export market as well owing to the competitive premiums. We received diesel from Greece on a small 5, 6 KT vessels to the shallow water ports on the Danube river. And premiums for Greek diesel fluctuated between 60-35 on FOB basis to FOB Med prices. But last year they landed at markups of 16-23 on the FOB basis. We assessed diesel prices at the Ukrainian port. This indication is important for the market because last year about 33% of diesel was imported to Ukraine on tankers and barges. And during the last year premiums at the CFR Ukrainian ports fluctuated between $50 to $100 per ton to high FOB Med prices.
Since the Russian invasion, Poland has been a major diesel supplier to Ukraine also, re-exporting domestically produced product and imported diesel as well. Our country received almost 1.7 million tons of diesel from Poland last year. It's up by 30% compared with 2023. And our market is the biggest market for Polish diesel export too. Strong demand from the Ukrainian market impacted on seabourn diesel deliveries to Polish Baltic ports. And last year they reached a new high to almost 5.3 million tons. In addition to domestically produced diesel and product loaded at the Baltic ports, Ukraine received substantial volumes of German diesel which Polish companies bought and stored in tank depots across the country for onward exports to Ukraine.
We also assessed premiums at the Polish-Ukrainian border and the outright prices and the border premiums also dropped as the Ukrainian market stabilized from roughly 200 to CIF ARA in 2022 to 85, 81, 85 last year. So the Ukrainian market is one of the biggest fuel consumers in Eastern Europe and will continue to impact on fuel flows in the region.
Alfonso: Thank you, Ivan. So it seems that we have a pattern of decreasing fossil diesel demand in Germany and growing fuel demand coming from Ukraine. So, Johannes, what is happening in the supply side?
Johannes: Yeah. So in Germany, what we see is definitely a trend towards less refining capacity which will likely in turn increase demand for imported diesel volumes. So from March 2025, the vesseling plant of Shell's Rheinland refinery in Cologne will stop the processing of crude. And towards the end of the year BP will downscale the Gelsenkirchen refinery also located in Western Germany by about a third. So before 2026, Germany will actually lose at least 13% of its total refining capacity. On top of that, German refineries are aging and as a result increasingly prone to unplanned outages.
Also, as you already mentioned, Alfonso, in the beginning, most recently the Neustadt plant of Bayernoil refinery in Bavaria had to be taken offline for the second time already in three months because of a fire. This shows that the ongoing decrease in domestic German demand does not necessarily lead to a sudden surplus of volumes which could be shipped elsewhere then. It remains to be seen how supply and demand will actually balance out in the end. But simply looking at a 13% run cut within one year opposed to the already mentioned 3% to 4% yearly decrease in diesel consumption, I think it's safe to say that we will likely see an increase in demand for imported diesel volumes into Germany, be it via the Rhine or the northern ports at least for the near future.
Alfonso: So thank you, Johannes. So it seems that supply it could be falling faster than demand which, obviously, implies diesel volumes being imported and we can see actually those flows of diesel coming into not only Germany but generally speaking into Europe those diesel cargos coming from the U.S. or from Middle East or India. If we look at future now, I would like to ask Ivan what is the view on the Ukrainian market in terms of future demand?
Ivan: Well, I'd like to emphasize that there was a substantial fuel crisis in spring 2022 in Ukraine when filling stations were dry because of the invasion, but our market quickly managed to find the new roads of supplies and, frankly, I doubt that we could face such a shortage and tightness again as we experienced at the beginning of the war. It goes without saying that now our demand is subdued over into the war, but our fuel market is quite diversified. It's completely in line with other European countries in terms of imports. For instance, we received diesel from the United States, Kuwait, Saudi Arabia, Sweden, India, and from other directions as well. And with peace returning to Ukraine, fuel consumption will grow along with the recovery of our economy. So we do hope so.
Alfonso: Thank you, Ivan. If we want to look at future projections in Germany that starts with the federal elections taking place now in February. Johannes, is this trend away from fossil fuels in general and diesel specifically about to change with the elections, do you think?
Johannes: So as I already teased in the beginning, energy transition and energy costs, in general, are currently big themes in Germany and, of course, also in the upcoming election. Since here you usually have to form some kind of coalition government, right, the plan put forth by each party is not set in stone or at least in parts up for discussion. But still when we simply look at the programs of the three parties which are most promising to play an important role in the next coalition, namely the conservative CDU, the social democratic SPD, and the Green Party. I would say that, generally, the shift to EVs and more biofuels will definitely continue.
Their positions might differ on the role which internal combustion engines then likely purely running on e-fuels or biofuels or whatever will play in the years ahead, but all of them acknowledge the Paris Agreement and EU as well as domestic climate mandates. The only party seriously considering abandoning all these climate agreements and even lifting sanctions on Russian oil and gas is the far-right AFD. Despite polling quite well, they will definitely not be part of the next government since no other parties want to form a coalition with them. So same as in other European countries, fossil diesel consumption in Germany is definitely poised to further decline. It's more about the question how fast the decline will take effect depending on which party comes out on top.
Alfonso: Thank you very much, Johannes and Ivan, for your insights. And thank you all for staying tuned. And if you enjoyed this podcast, please be sure to tune in for the other episodes in our series "Driving Discussions Europe." And for more information on Argus Global Refined Products coverage please visit argusmedia.com/oil-products. Stay safe and see you next time.
