Europe faces tight diesel market for summer

* Europe is the biggest diesel market

* Diesel inventories low in Europe and U.S.

* Spot wholesale premium highest since November 2011

By Ikuko Kurahone

LONDON, July 10 (Reuters) - Oil traders in Europe are striving to prevent a shortage of diesel this summer after refineries across the globe have closed or cut runs, pushing spot premiums to seven-month highs that may pass through to retail prices soon.

Traders say owners of diesel-fuelled cars are likely to encounter rising prices within a few weeks, although the impact will vary widely from country to country depending on retail competition, regulation and differences in economic performance.

European oil refiners face a mismatch between supply and demand for diesel.

Overall demand for refined products in Europe has shrunk, forcing refineries to close surplus capacity since 2009, due to a drop in dirty heavy fuel oil consumption and lower U.S. imports of European gasoline.

But the region lacks sufficient capacity to make diesel, in particular.

Instead of investing in new units, many oil companies have chosen to import diesel from the United States, Russia, the Middle East and India, where refineries' operating costs are lower than in Europe.

That leaves Europe vulnerable to a potential shortage of the auto fuel in case of a global supply crunch.

And a crunch is precisely what traders in the intermediary market have been struggling to avoid since late June, hoping to keep consumers oblivious of the problem.

"I am struggling to find cargoes. Diesel is scary tight, not just tight," a trading source said. The source, who has been handling physical diesel in Northwest Europe for about 20 years, asked for anonymity due to compliance.

"The market is the tightest I have ever seen," the source added.

Traders cited the impending closure of Britain's Coryton refinery, which used to be run by insolvent Petroplus , and the failed start-up of a new unit at the Motiva refinery in Texas as the main reasons leading to the tight supply of diesel.

"We have shut down too many refineries at the same time, and the new start-up in Motiva failed. So we have pushed the refining system tight for the short term," a trader said.

Some issues about diesel quality at Royal Dutch Shell's Pernis refinery in the Netherlands, Europe's largest, added to the tightness in late June, traders said. Shell then declined to comment.

"The product is just not available, partly because quality is not right. Refinery shutdowns are one reason too," independent analyst Pieter Kulsen said.

Spot premiums on 10 ppm diesel jumped to an eight-month high of $34 to $35 a tonne fob to ICE gasoil futures late on Monday from about $22 a tonne a week ago, according to Reuters data.

PASSING THROUGH

The rise in wholesale spot premiums is likely to pass through to pump prices in many European countries within a few weeks, traders said.

"High spot prices have to be passed on unless the market is very competitive and retailers squeeze their margins. But this is less likely, really," one UK-based trader said.

Spot premiums to buy diesel in the European wholesale and import markets are likely to remain high until wholesale demand starts to ease in August, typically ahead of retail demand, traders said.

Swaps show the premiums are likely to remain above $30 a tonne for July and ease to around $22 a tonne in August.

International Energy Agency (IEA) data shows Europe's major economies consumed 6.05 million barrels per day of middle distillates in 2011 such as gasoil for heating and diesel for cars, making the region the biggest distillate market in the world.

Imports had accounted for 6 to 7 percent of European demand before the Coryton closure, according to industry estimates, and the figure may well be higher now.

Competition for those imports is high, because the United States, a major supplier, has a bigger deficit in middle distillate inventories than Europe does.

Euroilstock data showed that European middle distillate stocks at end-May were running 13.4 million barrels below a year earlier. U.S. distillate stocks were down 24.3 million barrels from a year earlier, according to weekly official data at end-June.

A rise in wholesale prices usually is felt at the retail level after a lag time of about two weeks.

But the market in Italy will be at least one major exception.

Italian oil major Eni has committed to keeping pump prices low in a promotion that runs until Sept. 2. Eni has cut the prices of petrol and diesel by 20 percent on weekends for customers who use a self-service option.

Eni says it will sell fuel even below cost during the offer at its roughly 3,000 stations across Italy.

Traders said Eni has been scrambling to secure fuel on the wholesale market after a jump in its sales pulled down stocks at its tanks to levels that nearly fell below the minimums mandated by the IEA.

"They need to buy some cargoes for the system. Everything goes very quickly," said one trader, who is familiar with Eni's discount marketing. "And they need to keep the stock above certain level to meet regulation."