Russian Products Seek Shortest Paths to New Markets

A month after the EU implemented its embargo, Russian refined fuels are struggling to find substitute markets, while it remains unclear whether those that have might be working their way back to Europe as re-exports from other countries. Over the past month, Russia’s petroleum product exports dropped by about 250,000 barrels per day from their November-January average to 2.6 million b/d. The EU embargo that started on Feb. 5 is remapping global flows, forcing Russian exporters to reroute product shipments. After choosing the path of least resistance and focusing on proximity markets, they have started to venture further out. But stranded volumes of Russian products, particularly diesel, are amassing at sea either due to bunkering issues or a lack of buyers. At about 13.6 million barrels, floating diesel inventories are back to their pandemic levels, except this time there is no market structure to help pay for it. The ICE low-sulfur gasoil futures contract is moving into deeper backwardation, with prompt discounts recently doubling to more than $8 per ton. Russian diesel exports are being consolidated at the Baltic Sea port of Primorsk, keeping headline numbers high, even if total Russian volumes crumble. A record 538,000 b/d of ultra-low sulfur diesel (ULSD) sailed from the Baltic port in February, Kpler data show, the highest in two years. For now, Europe is having no problem sourcing replacements to Russian exports. But traders surmise that the coming refinery turnarounds could start to pressure crack spreads as more capacity comes offline.

The reshaping of Russian product flows is taking three forms. Some volumes are going to countries with a product export capacity, where they essentially free up domestic volumes of fuels for Europe. These “origin swaps” are taking place in Turkey, the Middle East and Asia. Significant volumes of ULSD are heading directly to end-user markets in Africa or in South America, where they also — indirectly — free up more Mediterranean and US fuels production for Northwest Europe. The rest is floating without a destination. Turkey has drawn attention by absorbing record volumes of Russian diesel and vacuum gasoil over the past month; at 9.1 million bbl, the country was the largest importer of Russian diesel in February. Tunisia and Morocco take the second and third spots, at 2.9 million bbl and 2.4 million bbl, respectively. Civil war-torn Libya is also showing up as a buyer of Russian diesel, and a wider trade is also emerging in select African countries, with Ghana leading the pack. Meanwhile, at least six cargoes of Russian ULSD also sailed to Brazil, now in the top five alternative outlets. Russia has also begun to export diesel to Saudi Arabia, which, like Turkey, is in a good position for potential origin swaps. China has scooped a few Russian cargoes too, but these were mostly naphtha. Naphtha was also the mainstay of Russian exports to India, Malaysia and Singapore.

Evidence of more lightering and ship-to-ship transfers indicates that new markets are unable to soak up the approximate 1 million b/d that the EU was importing in the months leading up to the ban. It also shows that shipping tonnage is constrained and matching fragmented orders with the available vessel sizes — some of which cannot travel long distances — is a headache. The shadow clean tanker fleet only represents 13.5% of total, clean and dirty shadow fleet tonnage, according to BRS Shipbrokers. Russia lacks sufficient storage capacity for crude and has even less for products, which means products must get stashed elsewhere. Land storage operators are now asking double the rates prior to the ban, which may force some sellers to choose the floating option but could stretch already thin shipping capacity to the breaking point. To make matters worse, the counter-seasonal strength in dirty tanker rates may incentivize shipowners to switch some of their long-range (LR) tonnage to dirty crude trade, adding another constraint on clean tonnage. Average clean Aframax/LR2 earnings last week on a combination of routes were about $53,000 per day. In comparison, average dirty Aframax earnings were closer to $85,000-$90,000/day. But for Russian sellers, betting on an imminent buyer can be risky. Shipping data show that at least 38 cargoes had no known buyer or destination, 22 of which carry Russian diesel/gasoil, representing an overall 10.7 million bbl, according to Kpler.

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