Source: U.S. Energy Information Administration, based on Thomson Reuters

Historically low water levels on the Rhine River in Europe have resulted in transportation disruptions for shipments of petroleum products by barge, which in turn have resulted in higher freight costs and higher prices in markets upriver, such as in southern Germany. These disruptions are occurring at a time when markets along the Rhine River typically build inventories of distillate fuel for space heating ahead of the winter.

The Rhine River, which runs northwest from Switzerland through Germany, France, and the Netherlands into the North Sea, is a major petroleum product transportation corridor. The navigable portions of the river connect the major refinery and petroleum trading centers of Amsterdam and Rotterdam in the Netherlands and Antwerp in Belgium, collectively known as the ARA, to inland markets.

Source: U.S. Energy Information Administration

Tanker barges carry petroleum products from the ARA upriver to inland bulk distribution terminals that provide petroleum products to nearby areas. Water levels on the Rhine River fluctuate with seasonal rainfall, and both high and low water levels can create problems for barges: high water levels on the Rhine may put barges at risk of potentially striking bridges over the river, and low water levels mean barges risk becoming stuck and hitting the river bottom. Within safety and operational constraints, barges adjust the amount of cargo they carry to balance bridge clearance and deep draft restrictions based on water levels. Low water levels mean barges must carry less cargo, increasing the freight rate per unit of cargo.

Water levels on the Rhine River measured at Kaub, Germany—near the Rhine’s midway point—have recently reached historic lows. The average water level at Kaub in October was 1.7 feet, compared to the five-year average level of 4.8 feet. The record low water levels in October 2018 are a sharp contrast to the water levels of early 2018 when water levels were at more than 20 feet.

Low water levels on the Rhine since July 2018 have resulted in increased barge freight rates. The estimated rate for a cargo of distillate fuel (heating oil or diesel) from Rotterdam, Netherlands, to Basel, Switzerland, increased from about $5 per barrel (b) in July to more than $35/b in late October. Rates have also increased for delivery to points closer to the ARA; delivery to Duisburg, Germany, is now at more than $4/b, compared with rates of about $1/b in July.

Distillate fuel prices at distribution terminals (rack prices) have increased in tandem with the higher freight rates at points upriver. The price of distillate for loading on trucks at Duisburg, Germany, went from a premium of $0.15 per gallon (gal) more than the ARA price in June to a premium of more than $0.20/gal as barge rates increased in October. Farther upriver in Karlsruhe, Germany, the same price spread went from about $0.20/gal in June to more than $0.40/gal in October.

Source: U.S. Energy Information Administration, based on Thomson Reuters

Alternatives to shipping products on the Rhine River are costly. Europe's petroleum product pipeline infrastructure is not as extensive as in the United States, leaving relatively more expensive transport options such as rail and long-distance trucking as the only alternatives.

These disruptions come at a time of year when markets upriver of the ARA usually begin to build stocks of heating oil for the winter. During a time when distillate fuel would normally be transported from refineries and terminals in the ARA region, the low water levels on the Rhine are keeping some distillate supplies in the ARA. Independently held distillate stock levels in the ARA rose from 15.7 million barrels at the beginning of July—6.9 million barrels lower than the five-year average—to more than 21.0 million barrels as of October 18—just slightly higher than the five-year average.

Ultimately, the duration and severity of the disruption will largely depend on the weather. The duration will mainly depend on precipitation because more precipitation in the Rhine River basin will lead to higher water levels and alleviate the shipping constraints. The severity of the disruption will largely depend on temperature because temperatures in the Rhine River valley will affect overall heating oil demand.

Principal contributor: Mason Hamilton