VW Crisis Signals Shift for Europe's Diesel-Focused Oil Industry

  • Scandal may jeopardize period of rising demand for fuel
  • Could help fortunes of Europe's gasoline-oriented refiners

Volkswagen's Brand: How Damaging Is the Scandal?

If European oil-market analysts have a single takeout from Volkswagen AG’s emissions cheating, it’s that the scandal is probably long-term bearish for the diesel market.

Europe’s refineries have been shifting for decades toward greater output of diesel to mirror alterations to the continent’s car fleet. As they have done so, imports have also surged, causing an ever-expanding glut to build up, while the fuel itself is under growing scrutiny for risks it may pose to public health.

“This will only be bearish for diesel prices,” said Christopher Haines, a London-based senior oil and gas analyst at BMI Research, which is part of the Fitch Group. “Output levels are good and at the same time stocks are high. If consumption dips, prices will follow.”

Futures slump as glut builds

Europe has record amounts of gasoil -- a near identical fuel to diesel -- held at independent storage tanks in Belgium and the Netherlands, according to PJK International, a Dutch firm that’s monitored regional supplies for decades. Debate about the fuel’s risk to public health had been growing long before the VW scandal: the World Health Organization said in 2012 that diesel-exhaust emissions cause cancer.

Volkswagen AG’s stock will be removed from the Dow Jones Sustainability indexes pending a review of its status after the carmaker’s admission it cheated on emissions tests, S&P Dow Jones Indices LLC and RobecoSAM said in a statement Tuesday.

The company is to announce a fix to emissions systems in the coming days that will be presented to regulators in October, newly-appointed chief executive Matthias Muller said in a speech to Volkswagen managers late Monday.

While Europe’s oil refineries have been boosting the proportion of diesel they make, a shift back toward higher gasoline consumption could be beneficial to them, according to Petromatrix GmbH, a consultant based in Zug, Switzerland. When the region’s plants were built, they were configured to make gasoline.

Europe imports diesel from Russia, the U.S. and also from newly built refineries in India and the Middle East that more than cover a domestic shortfall in output. Shifting back toward gasoline would help to make European plants more self sufficient, according to Alessandra Agnello, an analyst at Petromatrix.

“In the medium term, this is a negative for diesel and a positive for gasoline,” Andrew Echlin, an oil products analyst at consultant Energy Aspects Ltd., said. “It will greatly slow down any impetus towards dieselisation in the U.S., as well as encourage European regulators to take another look at diesel car regulations and testing, which were already planned for 2018.”

Diesel cars’ market share is already starting to dwindle in some European countries and drivers are becoming increasingly sensitive to pollution issues from the fuel, according to Petromatrix.

“Diesel consumption will fall as a consequence of the falling diesel car sales,” said Agnello. “The VW scandal will accelerate this trend, but it will take some time to see it.”

Independently held supplies of gasoil are close to a record at 3.6 million metric tons in Europe’s trading heartlands of Antwerp, Rotterdam and Amsterdam, according to data from PJK. Gasoil, once predominantly for heating, is now an almost identical fuel to diesel because of regulatory changes that lower its sulfur content.

About 41 percent of all European cars ran on diesel last year compared with 27 percent a decade earlier, according to data from the European Environment Agency. The proportion has grown every year for the past decade, a trend with which the region’s refiners have been doing their best to keep pace.

Europe's refineries don't make enough gasoline for domestic demand. Diesel shortfall more than covered with imports.

About 40 percent of the region’s refineries’ output is now diesel compared with 36 percent a decade ago, according to industry data compiled by Energy Aspects. Gasoline output has dropped to about 20 percent from 23 percent over the same timespan, Energy Aspects estimates.

“The scandal over manipulated data in VW diesel vehicles will cast a long shadow over the diesel market,” Commerzbank analysts including Eugen Weinberg said in a Sept. 24 note. “It could put the brakes on diesel cars and thus reduce consumption of diesel.”

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