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Russia Ripples Rearrange Atlantic Basin Products Trade

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A ban on Russian oil exports by the EU will intensify the rearrangement of Atlantic Basin petroleum trade flows, with US refiners likely to emerge as major winners.

“The United States has become the marginal supplier of an export barrel in the wake of cutbacks in Russian production and the inability of Russia to supply markets,” noted PBF Energy CEO Tom Nimbley during the company's recent first-quarter earnings call.

Russia launched its invasion of Ukraine in late February, triggering sanctions that have already sent prices and flows into disarray. But a full embargo by the EU would further disrupt supplies, with European consumers most directly impacted on the demand side, while Russian refiners, which are already under pressure, will have to find alternative markets for their diesel, unfinished oils and other products.

That dynamic is likely to prompt US refiners to raise exports and support bumper margins in the medium term while further tightening domestic markets.

Trans-Atlantic

For the EU, the situation is dire. In 2020, Energy Intelligence data show, the EU imported some 1.2 million barrels per day of Russian products. Europe is especially reliant on Russian diesel as its transportation sector is geared toward the middle-of-the-barrel product.

US refiners say they are already boosting shipments of products to Europe and that the region’s thirst for diesel is likely to keep the arbitrage window open and flows robust.

“We did move barrels into Europe [during the first quarter], and we see that as an increasing opportunity for us going forward,” said Brian Partee of Marathon Petroleum, the largest independent refiner in North America.

Data from both the US Census Bureau and tanker-tracking firm Kpler show significant increases in US diesel shipments to Europe. And preliminary weekly data from the US Energy Information Administration (EIA) show outright US diesel exports have jumped, a sign that rather than cutting into existing flows to Latin America, European-bound volumes are incremental.

Kpler data suggest total movements of clean products to Europe from the US averaged 203,000 b/d in April, up from 139,000 b/d in the same month last year.

While US flows to Europe rise, those going in the other direction are dwindling. European refiners face not only high crude costs but also painful natural gas prices and could cut utilization as a result. That would disrupt typical seasonal flows of gasoline from Europe to the US ahead of and during the peak summer driving season.

Kpler data show April clean product imports from Europe dropped by more than 300,000 b/d year on year, and current projected May shipments are down over 50% from 2021.

Boxed Out

Russian refiners, meanwhile, face a tall task in accessing markets outside of Europe. The Asia-Pacific is long products, and even though China, India and others are more than happy to buy Russian crude at bargain basement rates, they have little need of refined fuels.

Some experts have flagged the possibility of Russia shipping more products to Latin America, but such a move comes with its own hurdles.

“If Russian diesel can’t go to Europe, it needs to go somewhere else, and so you immediately have the issue of [whether] there is sufficient product tanker capacity to make a long-haul rather than a short-haul movement,” said Neil Earnest of Muse Stancil.

In addition to sky-high tanker rates, Russian volumes to Latin America would need to compete with those from a much closer source: namely, the US. Government data show that the US ships almost 3 million b/d of refined fuels to the region. Any Russian inroads would come at significant cost to Russian refiners, both in terms of transportation and outright price.

Ultimately, Earnest said, longer export routes for Russia may well be unworkable.

“If Russian refiners go from a Northwest Europe netback to a [Latin American] netback … I would anticipate throughput reduction at Russian refineries, and some of them might actually close because it doesn’t make sense anymore,” he explained.

New York Pain

The need to ship more product abroad to offset Russian losses has resulted in screaming high US Northeast diesel prices, with exports diverting volumes typically shipped from the Gulf Coast to Padd 1 on the Colonial Pipeline.

Indeed, NY Harbor diesel prices seem to indicate that more product should flow there. But experts and market players say the situation is murkier and that higher outright NY Harbor prices can be misleading.

For one thing, shipping product to Europe via tanker can take less time than piping it from the Gulf Coast to the US Northeast. The Jones Act — which requires domestic maritime trade in the US to take place on vessels crewed and constructed by US citizens and entities — makes domestic shipping via tanker more expensive as well.

Meanwhile, the forward prices for diesel tend to drop more precipitously in the US than they do in Europe. Those two dynamics inform where refiners choose to sell, especially as contract expiry approaches.

“The difference in the curves … explains why a Gulf Coast refiner might not be willing to send products to New York at the end of [the month]. A sudden drop in the spot price would cut the value of the shipment, especially if it was not hedged,” said energy economist Phil Verleger.

Topics:
Oil Products, Oil Trade, Diesel/Gasoil
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