The US sanctions against Russia have caused a spike in global diesel prices
Analysts and LSEG data indicate that global diesel prices and refinery margins increased following the latest round U.S. sanctions against Russia's oil market on the expectation of tightening supplies.
On Jan. 10, the United States imposed their toughest sanctions yet against Russian producers and tanks to reduce the revenue of the No. 2 oil exporter in world. The United States used the revenue of Russia's No. 2 oil exporter to fund its war in Ukraine.
Many of the newly targeted vessels, which are part of a shadow fleet, were used to transport oil to India and China. These countries have benefitted from the cheap Russian imports which were banned in Europe after Moscow's invasion in Ukraine.
Natalia Losada, an analyst at Energy Aspects, said that "Diesel (profit margins) are up after news about the sanctions and we expect significant disruptions to Russian Diesel exports." She said that the Russian diesel exports of Gazprom and Surgutneftegas are at risk.
Six months after the benchmark European diesel contract, the premium is equal to that of the first month's contract.
The diesel market had already entered backwardation. This is a term for a market structure in which contracts that are close to delivery trade at a higher price than contracts with a later delivery date. This is usually a sign of tight supply.
Diesel refining margins
The cold weather in northern hemisphere has already supported diesel markets.
On Monday, Asian diesel refining profit margins rose 8% to $17 per barrel, which was the biggest gain since September. They then fell to $16.50 on Thursday.
U.S. Diesel futures soared by more than 5% in the morning of Jan. 10. This was their largest daily gain since October. On Thursday, they reached a new six-month high at $111 per barrel. The front-month diesel contract is over $10 more expensive than the six-month contract. This is the highest premium in over a year.
Two Singapore-based sources confirmed that traders and refiners factor in the higher crude prices into fuel and refining costs. They also said that the lower Russian diesel flow is unlikely to have an impact directly on Asian markets.
A third source stated that even with higher diesel margins Asia's complex refinery margins have been weakened because crude prices have increased at a faster rate than refined products prices.
Dubai cash prices increased by 8.5% since last Friday. However, Singapore gasoil swaps for February only rose 5.5% during the same period.
Singapore's complex refinery margins, Asia’s bellwethers, hovered around 17 cents per baril on Thursday. LSEG data showed.
In order to make up for the shortfall, Europe, which was the largest buyer of Russian diesel before 2022 Western sanctions, has switched to India, the Middle East, and the United States.
James Noel Beswick, an analyst at Sparta Commodities, said that while most of the vessels sanctioned were used to transport crude oil and fuel oil, rather than diesel, the sanctions may have an impact on refinery runs in India or China by reducing their diesel production, and affecting exports to Europe.
In the event that Russian diesel supplies were significantly disrupted in any way, Turkey and Brazil would have to look for alternative suppliers, such as the United States or Middle Eastern countries, adding more competition to European buyers.
Analysts say that the market will eventually adapt to new sanctions.
FGE Energy analyst Eugene Lindell stated that "we don't expect to see major changes in Russian products flows" as the same volume can be transported to the same destination using non-sanctioned tanks.
(source: Reuters)
