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Leading Traders Warn of Looming Diesel Market Turmoil

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Energy Intelligence

Diesel markets will be much harder to “replumb” than crude when European Union sanctions against Russia step up next year, warned Vitol CEO Russell Hardy, with disruptions likely to affect jet fuel supplies.

Hardy was speaking alongside Gunvor CEO and Chairman Torbjorn Tornqvist and Trafigura’s Co-Head of Global Energy Ben Luckock at the Energy Intelligence Forum in London this week. The trio of trading executives have a ring-side view of how geopolitics are reshaping the global energy system.

Hardy suggested the crude market “is already solving itself” through trade. And he pointed to the recent rerouting of Russian heavy fuel oil to Asia as a likely blueprint for how the diesel market might handle the EU’s looming ban on Russian product imports.

The EU banned Russian fuel oil imports alongside coal on Aug. 10. Since then, virtually all Russian fuel oil has headed to the Middle East and Asia with “qualified” non-Russian fuel oil coming back to Europe in its place. The EU’s ban on crude imports takes effect on Dec. 5 with an embargo on clean products following on Feb. 5, 2023.

Hardy said he also expected some ousted Russian diesel to head to Africa and possibly Brazil. That could help free up more US Gulf Coast production to come to Europe, helping the market fill the 700,000 b/d gasoil hole left by Russia. Jet traders fear the focus on replacing Russian diesel will be at the expense of aviation fuel.

Distillate Shortages

Europe’s distillate markets are already extremely tight heading into winter with prices steeply backwardated. Trafigura’s Luckock highlighted the clear tension between prompt fuel shortages in Europe and the prospect of economic recession causing demand destruction.

Gunvor’s Tornqvist argued Europe will have a tough time without Russian gasoil. Major doubts remain around G7 plans to cap Russian crude and product prices. The scheme is designed to keep Russian fuels in the market, just not Europe. “Will it be effective? I have some serious doubts,” he admitted. The EU signed off on its price cap scheme this week.

Luckock suggested the price cap is only adding to current market chaos. Hardy warned it could backfire by shutting in Russian production. Moscow has vowed not to sell its fuels under the price cap system.

The front-month low-sulfur gasoil future on ICE has spiked almost 20% in the last week with French refinery strikes adding to Europe’s diesel market woes. As much as 800,000 b/d of French capacity is offline, wiping out at least 200,000 b/d of diesel production.

Oil Price Predictions

Hardy said energy market conditions are unlikely to change much over the next 12 months and predicted oil at $85 per barrel this time next year and natural gas over €125 per megawatt hour. Prices were almost $90/bbl and €165/MWh going into the Forum, which was held before Opec-plus agreed on a 2 million b/d output cut.

Chinese oil buying could rebound next year, suggested Hardy, spurring greater confidence across Asia. He reckoned that sky-high gas prices had already wiped 20%-25% from European industrial demand but warned the gas market is still short.

Tornqvist said there is little scope for prices to fall significantly over the next year, despite the risk that demand destruction could spread to Asia. He saw oil at $100/bbl and gas at €120/MWh in a year’s time. Luckock also put crude at $100/bbl but gas at over €150/MWh. "We might dodge a bullet this winter. Next will be much tougher... We're miles from out of the woods," he told the Forum.

The same three trading firms put oil prices at $75-$90/bbl when they were asked the same question at last year’s Energy Intelligence Forum. Gas price predictions were €35-€60/MWh or way below current levels.

Diesel/Gasoil, Oil Spot Markets, ENERGY INTELLIGENCE FORUM 2022, Oil Forecasts, Oil Prices
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