Russian Diesel Prices Tumble Ahead of G7 Products Cap

Russian ultra-low-sulfur diesel (ULSD) was changing hands at a lowball $130 per metric ton discount to other origins for last-minute delivery into Europe Monday.

Time is running out before the European Union’s Feb. 5 ban on Russian fuel imports, just as EU and G7 officials are starting to take a keen interest in market prices, with price cap negotiations due to start this week. Brokers said ships were becoming distressed, with the few remaining buyers in Germany and Poland only able to fit in a few more vessels before the deadline.

Current Russian ULSD prices net back to around a $39 per barrel premium to the G7’s current crude price cap. Shipping sources put the cost of transporting Russian fuel from Primorsk to Europe at an eyewatering $95/ton despite the short distance.

Europe’s traders are more concerned about where replacement fuel will come from than rules governing the price of Russian ULSD going elsewhere. Russia plays a huge role in Europe’s diesel market, supplying around 500,000 barrels per day of fuel, or around half of the region’s total imports.

“People are getting ready for non-Russian to be the norm … but Russia is still pumping it out at the moment,” says a leading London-based broker.

Early efforts to replace Russian ULSD have left Europe inundated with tankers from the US, India, Saudi Arabia, the United Arab Emirates and even China, all with Russian fuel still flowing. Prices are below where they were before Russia’s invasion of Ukraine.

Products Shortage?

But a supply crunch is looming as global diesel flows are forced to reroute. Russia is expected to target import markets in South America and Africa and free up more US and Mideast diesel to come to Europe.

EU Energy Commissioner Kadri Simson insisted in Abu Dhabi on Jan. 15 that Europe was prepared, with member states holding strategic products reserves covering 60 days of refined products as an initial buffer.

New trade to the Mideast Gulf could also back out increasing local production through so-called “origin swaps,” traders say. Some Russian ULSD has already been swapped in non-EU Turkey, they say.

“You bring Russian diesel into your system, [or] Russian fuel oil, and you export your own products to Europe and the US,” says one trading source.

European traders have rubbished suggestions that embargoed fuel could simply move through non-EU tanks and be sent back to Europe.

“The majors won't be able to take [it] and any EU country will get hammered if they do. It’s so easy to track everything now,” says one. “Also, the finance becomes very hard without the certificates of origin,” he adds.

Whatever the workarounds, an overall decline in Russian diesel exports is likely to tighten already-pinched global diesel balances.

A spike in clean tanker rates, which would also drive up fuel costs in import-dependent Europe, is also in the cards. Mideast-to-Europe tanker rates are already close to a three-year high at $60/ton, and are expected to at least double this year.