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EU Products Ban May Impact Oil Markets More Than Price Cap

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The muted reaction of both oil markets and Moscow to the EU’s price cap on Russian crude may not provide an accurate gauge of how its ban on refined products that kicks in on Feb. 5 plays out. Moscow has prohibited sales of oil that comply with the G7 price cap, while a top ranking official has said Russia may reduce production in 2023. Yet for now, oil markets are taking these developments in stride.

The proposed 500,000 barrel per day to 700,000 b/d cut is not meant to be preemptive. Rather, Russia is taking a wait-and-see approach to assess demand for its crude in 2023. Energy Intelligence oil market balances show that a large 1 million b/d oil surplus will build during the first half of the year and potentially dent demand for Russian barrels. Russia may end up disguising a lack of buying interest as a deliberate production cut.

The country remains vulnerable to the shift in Chinese demand, which underscores the lower pace of global crude buying. Distressed cargoes of East Siberia-Pacific Ocean (Espo) blend are struggling to clear to China, even at substantial discounts.

A retaliatory Russian cut is thought to be unlikely due to the revenue loss it would entail for Moscow, since oil makes up a much bigger share of Russian tax revenue than gas. It is probable that Russia will not push Opec into a corner by deciding on a unilateral cut either. If it did, Moscow would almost certainly not want Gulf producers to compensate for the reduction. Any contrary decision would imperil the Opec-plus group.

Year-End Diesel Lift

In contrast to the relatively minor share of Russian crude in Europe's overall import slate, Russia plays an outsized role in European diesel markets. Since the outbreak of the Ukraine war, Europe has done little to reduce its dependence on Russian diesel, which still accounted for 43% of Europe's imports in the first nine months of 2022, according to latest data from the International Energy Agency (IEA). That's down from a 52% share in 2021.

The fact that middle distillates account for a large 34% chunk of global refined product demand could magnify the impact of the EU ban. Jet fuel typically makes up 10% of worldwide fuels consumption, but that share shrank to just 6% last year due to the pandemic's lingering effect on air travel, Energy Intelligence data indicate.

Russia is still pumping as much ULSD into Europe as it can ahead of the Feb. 5 deadline. December arrivals from Russia via both Baltic and Black Sea ports are now pegged at 3.5 million metric tons (842,258 b/d), although this includes a smattering of Belarusian product shipped via Primorsk. Total diesel imports are at a record 7.5 million tons (1.8 million b/d).

Volumes from Russia have reached their highest level since March 2020. Nevertheless, Energy Intelligence data on cargo loadings show that Russia’s share of imports has slid from two-thirds to just under a half, as rival diesel producers in the US, the Mideast Gulf and Asia step up to the plate.

Kuwait has just loaded its first-ever winter-grade ULSD cargo for Europe. In a Dec. 25 statement, Kuwait National Petroleum Co. said it had shipped the 66,000 metric ton ULSD cargo. Tanker trackers say the cargo is heading for Le Havre.

Europe is relying on refiners in the US and East of Suez to cope with the vacuum left by the impending loss of Russian supplies. Volumes have been booming, but the longer diesel supply chains are proving less reliable, and European diesel stocks are still too low to cope with major disruptions. Last week saw the forced closure of up to 1 million b/d of US refining capacity due to cold weather and winter storms.

The latest figures from the IEA based on customs data rather than tanker movements show Russian gasoil sales to Europe down 17% in the year to end-September — before the latest surge — at 524,000 b/d. Total gasoil imports averaged 1.2 million b/d or 30% below current levels.

Big gains saw Saudi Arabia sending 149,000 b/d, India 94,000 b/d, the United Arab Emirates 77,000 b/d, the US 58,000 b/d and Singapore 39,000 b/d in the first nine months of the year -- when China was still missing.

Topics:
Diesel/Gasoil, Ukraine Crisis
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