Is the EU ready for life without Russian diesel?
The European Union has joined the United States and Britain in banning imports of Russian diesel and other refined petroleum products as it seeks to end its energy ties with Moscow, which for years was its biggest source of energy.
The ban is linked to a price cap on Russian refined fuel, aimed at hurting Russian revenue while ensuring the EU fuel embargo doesn’t end up driving up global diesel prices, which are already high. .
The embargo on petroleum products comes two months after a similar ban on Russian crude oil brought in by sea. Both were announced in June as part of the EU’s sixth package of sanctions against Russia in response to “Moscow’s brutal and unprovoked attack on Ukraine”.
While the crude oil embargo and oil price cap, which came into effect on December 5th, took place without major interruptions, the ban on refined fuels – in particular diesel with its widespread industrial and domestic use – has driven the market to uncertainty amid historically low diesel stocks in Europe.
“Oil is more fungible,” said Eugene Lindell and Joshua Folds of energy consultancy FGE. “It is much more difficult to produce diesel/diesel while for crude oil, upstream production is much more varied on a global scale. There are many more types of oil on the market and potentially there is diesel/diesel,” they told DW.
Will the ban increase diesel prices?
That would largely depend on the success of European countries in finding alternative sellers to help fill the void caused by the ban and on Moscow’s effectiveness in finding new markets for its fuel, now rejected by the EU. If these two things happen, the impact on supply and prices will be moderate and short-lived.
If not, the sanction could lead to major disruptions in diesel-dependent sectors such as transport and agriculture, with the fuel price hike further undermining the fight against inflation.
The perceived disruption is already pushing up diesel prices, which have been stubbornly high for the past year and a half. Although the situation has improved in recent months due to a mild winter, diesel stocks remain at uncomfortable levels.
Diesel prices may rise further in the near term to reflect an increase in transport costs as supplies will now need to come from more distant regions, higher production costs in countries such as the US and the risk premium.
“The market is very sensitive at the moment and very worried,” FGE analysts told DW. “The world has yet to see that these Russian flows are redirected and that there is no sustainable interruption in Russian flows. Once the market recognizes this, the risk premium and sentiment levels should fall.”
Who could the EU turn to for diesel?
The EU depended on Russia for almost half of its diesel needs before the Russian invasion of Ukraine on February 24, 2022. That share dropped last year but remained significant, with EU members buying over 200 million barrels of diesel last year according to energy. analysis company Vortexa.
Indeed, in the run-up to the ban, the bloc increased its purchases from the country to pre-invasion levels in preparation for getting rid of Russian fuel, something Kevin Wright, an analyst at energy data firm Kpler, described as the “last hurray” before the start of the embargo. “The last chance to buy from the closest major source, keeping shipping costs low compared to sourcing further afield,” he wrote in a review on Kpler’s website.
The ban left the EU short of about 600,000 barrels of diesel and oil products a day, a gap the EU aims to fill with increased supplies from the Middle East, Asia and the US. With its own refining capacity under pressure, the EU has been counting on these regions in recent months to make up the shortfall.
This dependence should only increase with the ramp-up of large refineries, such as the Al-Zour factory in Kuwait and the Jazan refinery in Saudi Arabia. Furthermore, Germany signed an agreement with Abu Dhabi National Oil Co, from the United Arab Emirates, which would allow the company to supply 250,000 tons of diesel per month in 2023.
The block could also benefit from so-called washing, while Russian diesel would be blended with other non-Russian products in countries such as Turkey and re-exported back to Europe.
What about China and India?
India and China, which have emerged as the biggest buyers of Russian crude over the past 12 months, could play an important role in bolstering EU diesel stockpiles.
Diesel exports from India to Europe have soared since the invasion, as refiners take advantage of low raw material costs thanks to deep discounts on Russian oil and high diesel prices.
In a sign of times to come, last year, when workers’ strikes shut down France’s refining sector, the EU saw a surge in imports of diesel and related products from India, which is not a traditional supplier of fuel to Europe.
China raised its first batch of 2023 export quotas for diesel and other refined oil products, whose exports have increased in recent months. The move is expected to keep its diesel exports at record levels, which could help push barrels from other producers westward into Europe.
“China’s policy is the watershed,” said Mark Williams, director of research at Wood Mackenzie, adding in a note to clients that the country “holds the key to all excess refining capacity globally”.
Source: DW
Lori Barajas is an accomplished journalist, known for her insightful and thought-provoking writing on economy. She currently works as a writer at 247 news reel. With a passion for understanding the economy, Lori’s writing delves deep into the financial issues that matter most, providing readers with a unique perspective on current events.