Oil markets are bracing for a new period of supply tensions as the European Union is set to cut off ties with its largest external diesel supplier when sanctions against Russian-refined fuel imports come into effect in February.
Diesel supplies are already running tight, leading to pump prices being higher than gasoline in many regions. European nations are one of the largest users of diesel relative to other motor fuels, with Russia historically being a major supplier. The EU had initially banned seaborne Russian crude imports on Dec. 5., 2022 And from Feb. 5, the ban will encompass refined fuels like diesel from the country as well.
Since the beginning of the year, oil prices in most of the physical markets have rallied, partly in expectation of tightening supply due to sanctions on Russia.
In the North Sea, Forties crude, which usually sets the value of dated Brent, is now trading at a premium of $0.30 to dated Brent after beginning this year at a discount of $0.92. Angolan oil cargoes and Nigerian oil have also seen prices surge in the past weeks.
Supplying Diesel to Europe
So far in 2023, Europe’s diesel imports have averaged 700,000 barrels per day, which is the highest level since March 2021. In anticipation of the Feb. 5th sanctions, buyers in Europe are scrambling to fill oil storage tankers in the region with diesel from Russia.New refinery projects are coming up in places like Nigeria, Saudi Arabia, and Kuwait. Though this would increase diesel flows to Europe, it is expected to happen only sometime later in the year.
At present, Europe is boosting diesel imports from the Middle East and Asia, with the increased demand raising freight rates and the final price of the fuel.
In case buyers in Europe fail to find alternative suppliers for diesel to meet its demand after the Feb. 5th sanctions come into effect, the measures against Russia could end up harming the region. For instance, industries reliant on diesel, like farming, could see costs rise, thereby fueling inflation and negatively affecting the economy.
Meanwhile, some countries might be in a position to play the middleman and make a profit out of the situation. They can essentially buy Russian diesel at lower prices, process it in their refineries, and then sell it to buyers in the EU.
Price Caps on Diesel
The Dec. 5th price cap imposed by G7 nations and the European bloc limited the price of seaborne Russian crude oil to $60 per barrel. Entities trading Russian oil above the level would be denied Western finance, brokering, and maritime insurance.The coalition now plans to set two caps on Russian oil products on Feb. 5, including a cap on diesel, which usually trades at a premium to crude.
“There’s always the potential that things may not go according to plan, but we’ve studied these markets very carefully, and we believe that we’re going to come out with a set of caps that will achieve the same things that we’ve achieved with crude so far,” she said.