Looming sanctions on Russia potential for diesel price spikes
Diesel shipments to EU have risen from India, which has been buying oil from Russia
An unprecedented chunk of the global diesel market, the workhorse fuel of the global economy, is just weeks away from being subject to aggressive sanctions.
From February 5, the European Union, the G-7 and its allies will attempt to impose a cap on the price of Russia’s fuel exports — the latest punishment for its war with Ukraine. That will coincide with an EU prohibition on almost all imports of Russian oil products.
Similar measures are already in place on the country’s crude shipments, but it is the cap and ban on refined fuels — and in particular diesel — that has some oil-market watchers concerned about the potential for price spikes.
Before its attack on Ukraine, Russia was Europe’s largest external supplier of the fuel and the continent has continued to buy in big volumes right up to the cut-off. As a result, the sanctions are likely to see a great rerouting of global diesel flows — aided by Russia’s new crude buyers sending fuel back to Europe. In the short-term, there’s a risk of higher prices.
Less panic
“The loss of Russian barrels is huge and replacing them will be a huge logistical challenge,” said Keshav Lohiya, founder of consultant Oilytics. “But the market is pricing in less panic as markets and trade flows have proven resilient. This will be a new rerouting of diesel.”
The European Union will have to replace about 600,000 barrels a day of diesel imports, and Russia will need to find new buyers for those supplies, store the fuel on ships, or cut production at its refineries.
Shipments into the EU from the US and India have already been on the rise as they produce more than they consume, allowing them to export their surfeit. China is also expected to send more of the fuel into its nearby markets, indirectly pushing cargoes from other suppliers toward Europe.
“Product flows from netlong regions will intensify as the continent’s embargo on Russian products takes effect February 5, which we see compounding a tight diesel situation,” Bernstein analysts including Oswald Clint wrote in a note to clients.
India’s role in supplying Europe is notable because it has become one of the biggest buyers of discounted Russian crude since the war broke out.
A big increase in Indian diesel flows would all-out guarantee that Russian crude was being purchased and refined into diesel in India before being sold back to Europe.
Such a trade wouldn’t breach the EU’s rules, but it highlights the inefficiency inherent in the sanctions. Essentially, hydrocarbons will be transported thousands of miles further than would normally be the case — and then back again. There’s also the potential for murkier practices, such as redocumenting cargoes, or sending fuel to refined products storage hubs in other regions to for blending with non-Russian products.
So far this winter, the worst predictions of oil scarcity have been averted. Diesel, which months ago was the epicentre of oil-market strength, has softened thanks to unseasonably warm weather and an influx into Europe.
Crude prices slid after sanctions on Russia appeared to reroute exports, rather than cut them. Among Moscow’s new — or bigger — buyers will be traders in Africa, Latin America and possibly Asia. Europe, meanwhile, will likely turn to the Middle East, where giant new refineries are ramping up operations.