Russian diesel next target of EU
Bloc aims to expand its energy embargo
On Feb 5, two months after the European Union banned most crude oil from Russia, the bloc will expand the embargo to Russian supplies of diesel and gasoline, the lifeblood of transportation.
The escalation is aimed at further throttling Russia’s energy business, cutting it off from its most important export market. Sales of petroleum products are crucial for financing the country’s budget and, ultimately, its war in Ukraine. The West is hoping to slowly diminish this source of money for the Kremlin.
“Russia lost by far its most important client,” Fatih Birol, executive director of the International Energy Agency, said in an interview.
But the coming shutdown of Russian fuel creates risks for motorists and truckers in Europe, who could face shortages and higher prices for diesel. While Europe has, so far, pulled off the embargo on Russian crude oil with little disruption since it started Dec 5, there are fears that the ban on refined products like diesel may not be so smooth. Prices for European diesel futures have already been rising.
“I think the implementation of this one may be more challenging,” Mr Birol said.
Diesel fuel is critical to Europe’s economy, powering not only trucks delivering goods but also more than 40% of cars in the European Union. Last year, Russia supplied about half of Europe’s diesel imports, around 700,000 barrels a day. These volumes may be hard to quickly replace, and in recent weeks European refiners have been preparing by building up their reserves.
“The pinch point is seen very much as being diesel,” said David Fyfe, chief economist at Argus Media, a commodities research firm.
Russia’s war in Ukraine and the Western reaction to it have already prompted sweeping shifts in global energy supply lines for crude oil and for natural gas. The coming ban on Russian petroleum products is expected to put the energy industry through yet another set of contortions.
“What is likely to happen is one
big giant reshuffle,” said Hedi Grati, an executive director for refining and marketing at S&P Global, a financial services firm. Mr Grati and other analysts say Europe will need to bring more diesel and other petroleum products from growing refining powers like Saudi Arabia, Kuwait and the United Arab Emirates in the Middle East as well as India, China and the United States.
There are signs that this shift is already underway, with countries like France and Germany reducing their purchases of Russian diesel, Mr Grati said. “Those countries are preparing for the divorce,” he added.
This rebalancing, which is only just beginning, will almost certainly cause strains that force prices higher, analysts say. For one thing, longer distances for shipping diesel will mean that larger vessels will be needed to bring products to Europe, and longer shipping times will add to costs.
There could also be a mismatch of
fuels. Russian refiners may try to sell diesel made for Europe to places where a higher concentration of pollutants is permitted, like West Africa, analysts say, while European energy companies will need to look harder for sufficient high-specification fuels that local regulations require.
Diesel supplies may be squeezed in other ways. With China’s economy likely to begin heating up thanks to the easing of Covid-19 restrictions, refineries there and elsewhere in Asia may shift to making jet fuel at the expense of diesel, reducing the amount of diesel available to send to Europe.
The hindrances on Russia may mean it is not able sell all its output. That could mean less diesel fuel in the global market, further crimping supplies that have been tight for months.
“Prices of all products will have to push higher,” said Richard Bronze, head of geopolitics at Energy Aspects, a research firm. “Europe is going to feel
that particularly strongly.”
Already, overall Russian diesel exports have dropped sharply in recent days, said Viktor Katona, an analyst at Kpler, a firm that tracks energy shipping. Mr Katona also said ships laden with diesel had headed from Russia to Morocco in recent weeks. Their cargo, he said, could be reexported to Spain or other Mediterranean destinations.
In a final wild card, the European Union, the Group of 7 nations and their allies will seek to limit the amount of revenue that Russia can earn from its refined oil products by setting a price cap, much as they did for Russian crude in December.
Western shippers and insurers will be permitted to handle only those Russian refined products sold under specified price levels that have yet to be announced.
In Europe, there is not expected to be a shortfall of diesel and other oil products when the embargo begins; reserves provide at least a short-term buffer. The question is more how the interplay of complex factors like China’s demand, the weather and Europe’s economy plays out over the ensuing months, people in the industry say.
“There is unlikely to be an immediate shock,” said Dev Sanyal, CEO of Varo Energy, a Swiss company with refining interests. “The market will have time to digest, and the market will have time to react.”
Still, the closely watched difference between the price of a barrel of diesel and a barrel of oil is more than $40 — well above what is considered normal, though not as high as at times last year.
Truckers and motorists are also paying high costs at the pump. In Britain, diesel costs about 15% more than unleaded gasoline, compared with an average of about 3% in 2021.
“This is the Achilles’ heel of Europe,” said Mr Katona.