When the river runs dry: how low Rhine water levels are reshaping Europe's oil market

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Emma Kettley:

Hello, and welcome to the Platts Oil Markets Podcast by S&P Global Energy, where today we'll be talking about the impact of the low water levels on the Rhine, a key transport route for refined products, and indeed many other commodities. Over the course of this podcast, we'll dig into the direct impact of the water levels on prices, on transport route options, and indeed look at how the impact may be already flowing down supply chains.

I'm Emma Kettley, and I manage the European and African crude and fuel oil pricing teams in London. And I'm joined today by David and Sophia, two of our middle distillate price reporters covering the markets directly impacted by this situation.

So David, starting with you, Rhine water levels have become a huge talking point in the market. What's happening on the river and are there any particular data points that the market is keeping a close eye on?

David Neef:

Yeah, so the Rhine is one of Europe's most important trade arteries, and it's critical for moving refined oil products from the ARA hub into inland Germany, Switzerland, and basically beyond that. But the key location everyone is currently watching is the Kaub gauge in Germany because it's one of the most shallow points on the river, and effectively it acts as a bottleneck for shipping.

So what we've seen over recent weeks is water levels falling dramatically due to all of this hot and dry weather that we've been seeing. And as those levels decline, barges basically have to reduce the amount of product that they carry. So once water levels fall below, let's say 75 centimeters, then barges can only load about a quarter of the normal capacity. Now, if we're seeing things go lower, let's say below 55 centimeters, then capacity is going to fall even further. And then if you see levels approach, let's say 40 centimeters, well, navigation can become severely restricted or just stop altogether.

So what has made the summer particularly concerning is that many market participants have told us that water levels are already approaching historically low levels despite much of the summer still lying ahead, right? Now, sources have also told us that the market is increasingly worried because, well, there are still several weeks of hot and dry weather potentially remaining. So this is raising concerns that water levels could fall even further and basically keep logistical constraints in place for an extended period of time. And that's why traders, refiners, I mean, even logistics companies watch the Kaub gauge almost daily because it's not simply a measure of river depth, it's effectively a measure of how easily oil products can move through Europe's inland supply chain.

Emma Kettley:

Yeah, lots of you will be keeping an eye on for sure. When we see travel disruption or other events causing disruption in the movement of commodities, we often see markets looking for alternatives. So what are the consequences for these markets in particular? Are there other transport routes available?

David Neef:

Absolutely. So the biggest impact, like I had mentioned, is basically on logistics. Now, the river often remains technically open, but barges can no longer carry the normal cargoes. So instead of moving a full shipment on one vessel, well, companies may need multiple barges to move the same volume of diesel, gas, or even naphtha. And basically what that does is that immediately pushes freight costs higher because vessel operators need to compensate for the lost carrying capacity. So many sources have told us that they're seeing that freight rates are just sky-high at the moment during these, well, recent low water periods, right? And some have said that barges were moving with just very little tonnage.

Now, the alternative is to use rail trucks or pipelines, but that's not really straightforward. Rail capacity is limited, and market participants have repeatedly said that it becomes difficult to secure enough tank wagons to replace that large barge capacity. And if you think about this, as a result, the farther inland you go from the ARA hub, the more pronounced the logistical challenges become because companies are often forced to pay higher transportation costs simply to keep products moving to end users.

Emma Kettley:

Thank you, David. You've picked out a couple of really key themes that we often are looking at across all commodities and how that impacts prices, whether that's supply constraints, whether that's the cost of transport, all of these we often see feeding into the prices of those products.

So Sophia, moving to you, how are we seeing prices impacted by this situation?

Sophia Aung:

Yeah, so obviously, as David has mentioned, if you are trying to transport the same volume of a commodity down the Rhine, but the barges themselves are able to carry less product, you're going to have to use more vessels. That cost is going to have to be spread amongst the final cost of the product. And so yeah, we really have seen barge prices push up. On the 10 PPM diesel side, barges reached $1,335.75 per metric ton on the last day of July, and that has actually been the highest since April. So at near wartime peaks, and that's largely due to this low Rhine level.

And then in terms of how that's then affecting the wider diesel market in Europe, so there's what is known as an inland premium when these river levels get so low that you're having to pay more the same product inland than at the coast. So that's obviously one of the main issues with this issue at the moment. And then to try and combat that, local refineries in Germany will try and increase their production as much as possible. So diesel at the moment is production is being maximized over jet, which is a [inaudible 00:05:14]. So owing to the high prices, it's cost-effective for refineries to push production of diesel known as having a high crack. And so when this happens, yeah, refineries are working as hard as possible to deliver this product to inland market. With that comes risks. The risks of unplanned maintenance are quite high when these refineries are pushing their capacity as much as possible. And in hot weather, that can be an issue. As much as the market is trying to compensate for the lack of barges coming down, there is only so much that these inland refineries can do.

Another effect of the low water levels is that previously in April time, we were seeing that when inland refineries were at maximum capacity, they often had surplus product to supply the local demand. And so they'd start pushing things back up the Rhine towards ARA, the Amsterdam, Rotterdam, Antwerp hub. And this was then able to be transported around Northwest Europe in general. So it was kind of supplying the wider European market when there was sufficiency in land. Now this can't happen either. So there's sort of a general tightness in Europe because of various factors, including the Russian diesel export ban at the moment, and this Rhine situation is just not helping and ultimately pushing prices up across the continent.

Emma Kettley:

Yeah, and it's interesting how the direct impact that you talk about with refiners maximizing their diesel production, that has the knock-on effect then on other products. If you're maximizing one product, you're then producing less of another. And we're starting to see the byproduct impacts on the fuel market, for example, with less production there and less blending components there for some of those lower sulfur grades.

So David, coming back to you looking ahead, what are the key risks that you're hearing the market are watching out for? Are there any historical examples that they're potentially comparing this summer's Rhine water levels to?

David Neef:

Well, that's really the question that everyone is asking. There have been some forecasts that suggest that water levels could challenge or even break previous records, but some projections are showing that the Kaub gauge is probably falling below 20 centimeters. You do have those projections as well. But if those levels are reached, then navigation restrictions could become extremely severe. And many sources have told us that they've already said that they've been preparing some contingency plans in case of this situation, and this includes greater reliance on rail or trucking or even pipeline systems as well. So risks do remain significant. The Rhine is used to transport not just oil products, but chemicals, metals, and so many different other industrial goods. So if disruptions become prolonged, the effects could really extend beyond energy markets and into a broader supply chains across Germany and of course neighboring countries as well.

Now, the comparison many people make is with 2018, and that is when we saw record low water levels. It caused a lot of supply disruptions in the region. And basically whether we reach that level of disruption again, well, that's largely going to depend on weather in the coming weeks. But for now, the market is really watching the Kaub gauge extremely close every single day because every centimeter matters. And when it comes to keeping products flowing inlands, this is vital. This is important. So the main point out of all of this is that the market has adapted before to low water level events, but the challenge this year is that Rhine disruptions are colliding with an already tight diesel market. And whether water levels recover or continue to fall play a major role into determining how easily these products can move inland and how much consumers can ultimately pay for them.

Emma Kettley:

Thank you, David.

And Sophia, I just want to close out with you when we often talk around on the oil markets podcast where we focus on the direct impact on what are the traders doing, what are the suppliers, the refiners all doing with these products, but we're talking about transport fuels. These have a real understanding for a wide range of our listeners. These are products that we're all using on a daily basis driving our cars, et cetera. So how are we seeing the disruption actually flowing down the supply chains and impacting the end consumer?

Sophia Aung:

Yeah, of course, that's always the question on most people's mind is, "How is this going to impact me directly?" And with rising fuel costs on a wholesale level, you are going to see that trickle down ultimately to the level of the consumer. And so as I mentioned, when wholesale prices such as the barge price for diesel increases to near wartime highs, we're going to eventually see that affect pump prices for the cost of diesel that you're going to put into your car. And so with not only with the Rhine water level issue, but also with wider geopolitical issues such as the Russian diesel export ban and uncertainty around shipping flows through the Strait of Hormuz, we have seen cargo prices, barge prices, and then ultimately diesel pump prices rise across Europe. But if you look at the most impacted countries by the Rhine water levels such as Germany, we're seeing a disproportionate rise in those pump prices, suggesting that this Rhine water level situation is having a direct impact on end consumers.

So just to look at the statistics, according to data from the European Commission, the German diesel pump price on average each week rose from 176 euro per liter at the beginning of July to 2.18 euro per liter by the last week of July. And comparatively, the EU average was 2.01 euros per liter. So there's a substantial premium being paid in Germany compared to most EU countries, which is obviously going to have an impact on end consumers in Germany. Speaking to market experts, one of the things that the market is most concerned about is that if people are looking at these high prices, they may be disincentivize from buying fuel, looking for alternative transport modes. This is known as demand destruction. And so when this phenomenon happens in a market, you actually see a shift in fundamentals, less product is wanting, people are wanting to buy less product, and ultimately that kills some of the rock demand and might bring prices back down.

And so it will definitely be an interesting thing to watch. If these prices continue to rise, we may well see some of that demand come off and prices on the wholesale level come back down again. But yeah, we'll have to see.

Emma Kettley:

Yeah, and this is how commodity prices reach a ceiling, right? They keep rising to the point where people are no longer willing to pay for it and then they have to come down to find that demand. So thank you both for a great summary of what we're seeing in the market at the moment. Lots to keep an eye on as well, not only the direct impacts on clean refined products, but how those refinery yields and those refinery pushes actually impact the broader oil markets as well. So thank you again for your summary and thank you to our listeners for joining us today.