Product Ban Presents New Problems for EU

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From Feb. 5, when the EU ban on imports of Russian petroleum products kicks in, Europe will have to find just over 1 million barrels per day of alternative product supplies, nearly half of which is diesel. Fortunately, European traders had over half a year to prepare for this watershed in global oil markets, and they sharply raised imports in November-December to stockpile products ahead of the ban. But many observers still worry that over the long run Europe will encounter a diesel deficit, given the overall tightness in global supplies of this crucial middle distillate product. This raises the prospect of higher-for-longer prices and economic pain for European motorists, businesses and agriculture — and it threatens to push the entire global crude and products complex upward. There is speculation the EU may exempt some diesel imports from Russia, as it did with crude. And there is also talk that some traders may try to re-export Russian diesel from non-EU countries to Europe. Last year Europe (excluding Turkey) imported some 1.2 million b/d of oil products from Russia, about 100,000 b/d less than in 2021, according to shipping data. About 100,000 b/d of those products were re-exported from countries like Estonia and Latvia to non-EU destinations, bringing net imports to around 1.1 million b/d. European buyers have been loading up on Russian diesel ahead of Feb. 5, some with genuine supply security concerns in mind. Germany, for example, bought one-third of the 590,000 b/d of diesel that Europe continued to import from Russia in December 2022. France took 14% and Poland 13% of these imports.

About 500,000 b/d of Europe's products imports from Russia consisted of ultra-low-sulfur diesel (ULSD), which is now considered the Achilles' heel of the region's products market. Russia accounted for just under half of EU-27 diesel imports last year, or approximately 10% of the EU's consumption of this product. To be sure, the dependence is mutual: diesel sales to Europe accounted for about 70% of Russia's average diesel exports of 690,000 b/d last year. Finding alternative buyers will be a major challenge for Russia's refining industry, the third largest in the world. Among EU countries, France and Germany were the largest diesel importers from Russia — taking 135,000 b/d and 100,000 b/d, respectively, last year. Other large importers included Poland, Belgium and the Netherlands. Turkey, meanwhile, has ramped up its offtake of Russian diesel in recent months, leading to questions about potential re-exports to EU countries in the near future. In December, Turkey imported nearly 200,000 b/d, shipping data show — even overtaking Germany's imports of 195,000 b/d for that month. Turkey's December imports were four times the average volume of its diesel imports from Russia in January-September.

Non-Russian diesel imports by EU countries were up by nearly 200,000 b/d in the second half of 2022 compared with the first half. But it's unclear if these suppliers can completely make up for the loss of Russian diesel. Top suppliers outside of Russia are Saudi Arabia, Italy and the Netherlands. India has also figured more prominently since March 2022. So far, product sailing from the Mideast or India has provided ad hoc relief. But if Europe continues to dramatically ramp up long-haul ULSD from the Mideast and Asia, this will create shipping complications. Landmark projects that came on line recently, like Kuwait Petroleum Corp.’s (KPC) 615,000 b/d Al-Zour refinery and Saudi Aramco’s 400,000 b/d Jazan refinery are expected to have a material impact. KPC and several Western oil companies have already signed diesel supply agreements, with Al-Zour poised to produce about 160,000 b/d of ULSD. Based on refinery configurations, Energy Intelligence pegs Saudi diesel capacity at a minimum of 1.1 million b/d, India’s at 1.6 million b/d, and Turkey — another contender for diesel exports to Europe — at 330,000 b/d. But to ship additional volumes to Europe, more clean tankers will be tied to longer voyages. If a four to six-day voyage from the Russian Baltic becomes 20 to 25 days from the Mideast Gulf, then clean product tonnage will be in high demand. Little newbuilt capacity will come on line in 2023-24, and the second-hand market is already on fire to satisfy the shadow Russian trade in crude.

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Oil Products, Oil Trade, Oil Supply, Sanctions, Ukraine Crisis
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