Middle Distillates Take Late-Summer Russian Spotlight

Copyright © 2021 Energy Intelligence Group

Now that Russia is emerging from its midsummer gasoline crisis, diesel is poised to hog some of the spotlight. Planned maintenance for September in the refining sector will knock out nearly 50,000 metric tons (375,000 barrels per day) of daily gasoil production, or about 18% of total capacity. This will result in lower exports to Europe in September, just when European purchases of ultra-low-sulfur diesel (ULSD) have reached a post-pandemic high (NC Aug.19'21). Plenty of diesel will remain for the domestic market, which normally soaks up about half of the country’s prolific output of about 1.62 million b/d. And since gasoil sales at home currently receive a small subsidy from the state -- the so-called buffer mechanism -- producers will have no qualms about keeping gasoil at home (NC Aug.12'21). In the meantime, Russia’s rail-based jet fuel exports have plummeted to a mere 6,160 b/d so far in August, according to data seen by Energy Intelligence. That is less than half of July’s volumes when when jet exports were 13,300 b/d by rail. By comparison, in February these were 22,500 b/d. As more Russians opt to travel domestically this year, local air carriers are fueling less abroad and more at home, triggering an unprecedented spike in demand. In addition, Rosreserv, the state’s strategic stockpiling agency, is currently snapping up large volumes of jet fuel, sources say. As a result, refineries are adjusting their slates accordingly: Jet fuel output in Aug. 1-17 reached 333,000 b/d, which is more than 8% higher compared to July. More to the point, it is slightly higher than the monthly record posted in July 2018 when Russia hosted the World Cup for soccer and ran its refineries to the tilt. Running a Discount Crude exports are proving to be hard work. Urals crude differentials remained unchanged to slightly firmer for the week, with no significant buying interest to awaken a relatively subdued market (NC Aug.19'21). In Northwest Europe, cargoes improved from steady discounts of about $2.40 to dated Brent, while Mediterranean trade levels were closer to $2.90 discounts. There was hope that a narrowing Brent-Dubai EFS spread -- a premium of Brent futures over the Dubai cash market -- would rekindle the physical arbitrage to the East of Suez. The spread has narrowed $1/bbl but has remained at a sticky $3.00/bbl, forcing Urals sellers to maintain deeper discounts for arbitrage cargoes to flow out. The Covid-19 suppression strategy in Asia -- with lockdowns after just one infection -- is keeping a lid on economic activity there, limiting crude arbitrage flows from the Atlantic Basin. In the Far East, weaker spot demand is visible in the prices of Russia’s East Siberian-Pacific Ocean (Espo) blend, whose premiums have hovered around $1.70-$2.00 to Dubai quotes, their weakest level since March 2021. Other than China and South Korea, India remains a key commercial target for Russian and Kazakh crude. Since about July 2019, the country has been a steady buyer of CPC Blend, a light, sour crude produced in Kazakhstan that usually blends well with heavier, sour crude to yield a gamut of refined products. Owing to its high sulfur content and mercaptans, CPC does not fit any refinery and is usually offered at generous discounts to clear to destinations -- India, for instance -- where processing this smelly but bargain feedstock is less an issue. Russian oil sellers have been trying to wedge a larger share of India’s crude market after the country pledged to diversify away from its Middle East supply in March 2021. Gary Peach, New York, and Julien Mathonniere, London Spot Crude Oil Prices $/bbl f.o.b. terminal

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