Global Diesel Prices Surge Amidst US Sanctions on Russian Oil Trade
The latest round of US sanctions on Russia’s oil trade has sent global diesel prices and refining margins soaring, as analysts predict a tightening of supplies. The sanctions, imposed on January 10, target Russian producers and tankers, aiming to curb the country’s revenue for its war in Ukraine.
Shadow Fleet Under Scrutiny
Many of the newly-targeted vessels, part of a shadow fleet that seeks to circumvent Western restrictions, have been used to ship oil to India and China. Refiners in these countries have benefited from cheap Russian imports, which were banned in Europe following Moscow’s invasion of Ukraine.
Diesel Profit Margins on the Rise
“Diesel profit margins are up following news on the sanctions, and we expect meaningful disruptions to Russian diesel exports,” said Energy Aspects analyst Natalia Losada. At least 150,000 barrels per day of Russian diesel exports from Gazprom Neft and Surgutneftegas refineries are at risk.
Market Structure in Backwardation
The premium of the first-month European diesel benchmark contract to that six months later spiked to $50.25 a metric ton on Thursday, a 10-month high. This market structure, known as backwardation, denotes tight prompt supply. Diesel refining margins stood at a five-and-a-half month high of $20 a barrel on Thursday.
Cold Weather Boosts Diesel Markets
Cold weather in the northern hemisphere has already been supporting diesel markets. Asian diesel refining margins jumped 8% on Monday to above $17 a barrel, the largest gain since September, before easing to about $16.50 a barrel on Thursday.
US Diesel Futures Surge
US diesel futures surged more than 5% on January 10, their biggest daily gains since October, and hit a six-month high of $111 per barrel on Thursday. Front month diesel is commanding an over $10 premium over the sixth-month contract, the largest premium in almost a year.
Asian Markets Less Affected
Traders and refiners are factoring the higher crude costs into fuel prices and refining runs, but lower Russian diesel flows are unlikely to have a big impact on Asian markets directly. Even with higher diesel margins, Asia’s complex refining margins have weakened as crude prices have gained at a much faster pace than refined product prices.
European Buyers Scramble for Alternatives
Europe, which before the 2022 Western sanctions was the top buyer of Russian diesel, has switched to supplies from India, the Middle East, and the United States to cover the shortfall. Russia’s biggest diesel buyers, Turkey and Brazil, would need to find alternative sellers like the United States and Middle Eastern countries in case Russian supplies are significantly disrupted.
Adapting to New Sanctions
While some analysts predict significant disruptions to Russian diesel exports, others believe the market will eventually adapt to the new sanctions. “We don’t actually expect to see any major changes in Russian product flows, as the same volumes can travel to the same destinations, just using non-sanctioned tankers,” FGE Energy analyst Eugene Lindell said.
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