Global Oil Markets Facing Uncertainties With EU Moving Away From Crucial Russian Diesel Supplies

The Vladimir Arsenyev tanker at the crude oil terminal Kozmino on the shore of Nakhodka Bay near the port city of Nakhodka, Russia, on Aug. 12, 2022. Tatiana Meel/ Reuters

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.

“Any shortfall of Russian product exports could coincide with higher demand in China, tightening markets even further and raising the prospect of price spikes that renew inflationary pressure,” Henning Gloystein, an analyst at Eurasia Group, said to the Financial Times.

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.

“It seems clear that physical differentials have gone up in January, and I expect them to do so further in February. There is good, healthy demand,” a London-based trader said to Reuters. “It’s been a fast turnaround from December … I’m sure Russian supply uncertainty is also part of it.”

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.

“#Europe continues to source more than a quarter of its #diesel imports from Russia, according to tanker-tracking data, weeks before the EU’s latest embargo blocking flows of Russian oil products into the trade bloc,” S&P Global said in a tweet on Jan. 20.

[https://twitter.com/SPGlobal/status/1616405327859122179]

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.

While talking to reporters in Africa, U.S. Treasury Secretary Janet Yellen said that setting price caps for oil products like diesel has proven “more complicated” than crude, according to Reuters.

“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.