Europe hastily stocking up on Russian diesel in anticipation of embargo turbulence

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This piece was produced in Gdansk for the Reuters news service in Russia, where legislation restricts coverage of Russia’s special military operation in Ukraine

LONDON, Jan 16 (Reuters) – European traders are rushing to fill storage facilities with diesel from Russia ahead of a ban on Russian oil products coming into effect Feb. 5, which is expected to lead to destocking, changes in global transport routes and increased price volatility.

In addition, the imposition of an embargo may cause a shortage in the supply of the product. Europe hopes to fill it with Chinese fuel, which, apparently, will be partly produced from Russian oil.

China increased the first package of export quotas for oil products in 2023 by almost half compared to the level a year earlier.

Most of that is likely to come from China’s diesel exports, which could reach 400,000-600,000 bpd, said Wood Mackenzie’s Mark Williams.

“But without Chinese exports stimulating oil supplies to the West, Europe is unlikely to be able to replace the loss of half a million barrels per day coming from Russia after the imposition of the embargo,” Energy Aspects analysts say.

FLY, HURRY, BUY OIL FROM RUSSIA

The volume of European imports of diesel fuel from Russia this month is 770,000 barrels per day, which is the highest figure since March last year, data from the analytical company Vortexa showed.

“European buyers are rushing to import as much (Russian oil products) as possible ahead of the ban,” said Vortexa’s Rohit Rathod.

For many years, Russia has been the main supplier of diesel to Europe, where the production volumes of this type of fuel are insufficient to meet domestic demand, primarily from car owners.

While European governments and companies have sought to cut economic ties with Russia since the start of a “special military operation” in Ukraine last year, nearly half of all European diesel imports still came from Russia, according to Refinitiv data.

In addition to the EU ban on the import of Russian oil, which came into force in December, an embargo on oil products from the Russian Federation will be introduced from February 5.

It is expected that this measure will make a fundamental change in the structure of cargo transportation and entail significant costs.

WoodMac forecasts diesel to crude oil margins to average $38/bbl in January-June, more than double the 2018-2022 six-month average when compared to Refinitiv Eikon data.

“The high price of diesel fuel will continue due to the complexity of logistics and transportation costs. This kind of confusion, which consequently reduces market liquidity, is likely to keep diesel production margins high, as we’ve seen in 2022,” said PwC’s Rob Turner.

In his opinion, Europe can no longer rely on the blending of Russian middle distillates, the upgrading and desulfurization of substandard feedstocks from the Russian Federation, and the widely used Urals oil for diesel fuel in the oil refining system, as it was before the conflict in Ukraine.

Traders rushed to stock up on diesel ahead of the ban, and in the week leading up to Jan. 12, regional inventories rose to their highest level since October 2021, data from Dutch consulting firm Insights Global showed.

Inventories are expected to drop sharply once the embargo comes into effect, Energy Aspects points out.

REORIENTATION OF CARGO FLOW

In recent months, a number of supertankers with a capacity of 2 million barrels of oil have been chartered to import diesel fuel to Europe from Asia and the Middle East.

However, transportation of fuel from Russia to Northwest Europe usually takes a week, while cargo from the east takes on average up to 8 weeks, and such transportation costs significantly more.

Matt Wright of Kpler believes that demand for oil product tankers will grow by 7.2% in 2023 compared to the third quarter of 2022 due to increased route lengths.

An increase in the duration of voyages will cause a drop in the turnover of tankers, limiting the availability of tonnage.

“The next 12 weeks as international trading recovers is not going to be an easy ride,” WoodMac’s Alan Gelder said. “Trade will be much more volatile.”

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(Ron Busso, Rowena Edwards and Ahmad Ghaddar in London)

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