EU Product Ban Is Market's Big Wild Card

Markets are struggling to assess the potential threat from the EU's Feb. 5 ban on Russian refined product imports. While a recession or higher Chinese product exports could help mitigate any supply disruption, there is no getting around that shipping constraints will challenge re-routing the global trade of oil products — a less fungible commodity than crude. Three key factors will determine how disruptive the ban could be: (1) the quantity of replacement diesel available for Europe, (2) the discounts alternative buyers will demand on Russian products to keep them flowing, and (3) the amount of clean tanker tonnage that will be available to transport them. For now, the initial impact may be limited by Europe's recent stockpiling of products. But regardless of the macro-economic outlook, a material shift in trade patterns and higher refinery runs will be needed to ensure a smooth transition. About 1.5 million barrels per day of ultra-low-sulfur diesel (ULSD) shipped to the EU-27 in December, including 600,000 b/d from Russia, Kpler data show. But the region remains structurally short diesel — which won't change even with lower demand from a recession —and a sizeable share of the 1.2 million b/d of Russian product that it imported must be replaced. Even at more than 85% utilization on average, OECD Europe refineries cannot do that alone. Regional runs seem to be maxed out already, increasing by 7.3% to 11.8 million b/d in October before idling at roughly the same levels in December. The situation is similar in the US and Middle East. Only India and China have ramped up runs since October: India by 6.3% to 4.8 million b/d, after pushing more Urals crude into its refining system, and China by 5.6% to 14.9 million b/d, after independent refiners received 20 million tons of crude import quotas to use by year-end.