Europe boosts Russian diesel buying ahead of ban set to rock market

© Reuters. Great Wenchao bulk carrier lies at anchor in Nakhodka Bay near the port city of Nakhodka, Russia, December 4, 2022. REUTERS/Tatiana Meel

By Rowena Edwards, Ron Bousso and Ahmad Ghaddar

LONDON (Reuters) - European traders are rushing to fill tanks with Russian diesel as the clock runs down on a Feb. 5 European ban expected to tighten supplies, redraw global shipping routes and increase price volatility.

The ban is likely to create a diesel supply shortfall that Europe hopes to fill with Chinese fuel, some of which will be produced from Russian crude.

China has raised its first batch of 2023 export quotas for refined oil products by nearly half from a year ago.

Its diesel exports, likely to make up most of the quotas, could reach 400,000-600,000 bpd in January-June, said Mark Williams, research director of short-term oils at consultancy Wood Mackenzie.

"But without Chinese exports pushing swing barrels westward, Europe is unlikely to replace the 0.5 million bpd loss in Russian diesel exports come the embargo," Energy Aspects analysts said.

IMPORT RUSH

European diesel imports from Russia stand at 770,000 barrels per day (bpd) so far this month, the highest since March last year, according to energy analytics firm Vortexa.

"European buyers are rushing in to import as much as they can ahead of the ban," said Rohit Rathod, senior oil market analyst at Vortexa.

Russia has long been the main diesel supplier for Europe, where refineries do not produce enough to meet domestic demand from its large diesel car fleet.

Even as governments and companies sought to sever economic ties with Russia after it invaded Ukraine, Europe last year relied on Russia for nearly half of its imports of diesel, known as middle distillates, Refinitiv data shows.

(Graphic: European diesel imports from Russia, https://www.reuters.com/graphics/EUROPE-DIESEL/zdpxdrnwepx/chart.png)

An EU ban on Russian crude imports that took effect in December will be broadened to include refined fuels from Feb. 5.

It is expected to bring an abrupt change in trade flows and will come at a cost.

WoodMac expects diesel margins to crude to average $38/bbl in January-June, more than double the 2018-22 six-month average when compared with Refinitiv Eikon data.

(Graphic: European diesel margins to crude, https://www.reuters.com/graphics/EUROPE-DIESEL/zjvqjewlapx/chart.png)

"The high price of diesel will be maintained due to complex logistics and shipping costs. That complexity, which is consequently reducing market liquidity, is likely to keep refining margins on diesel up in the same way as we have seen in 2022," said Rob Turner, sector leader for Energy and Resources at PwC UK.

Europe can no longer rely on blending Russian middle distillates, on upgrading and desulphurising off-spec Russian grades, or on using diesel-rich Urals crude in the refining system as it did before the conflict, Turner noted.

Traders have rushed to stock diesel ahead of the ban, with regional inventories rising to their highest since October 2021 in the week to Jan. 12, data from Dutch consultancy Insights Global showed. [ARA/]

Stocks are expected to drop after the ban kicks in, said Energy Aspects.

(Graphic: ARA gasoil stocks, https://www.reuters.com/graphics/EUROPE-DIESEL/znpnbzkgapl/chart.png)

GLOBAL REROUTING

Some of the world's largest tankers, with a capacity of 2 million barrels of oil, have been chartered in recent months to import diesel into Europe from Asia and the Middle East.

However, shipping fuel from Russia into northwest Europe typically takes a week while cargoes from the East take up to 8 weeks on average, leading to higher freight costs.

Latvia, which shares a border with Russia, imported its first cargo of diesel from China this month in a sign of the redrawing of trade routes.

Demand for refined products tankers is set to rise by 7.2% in 2023 compared with the third quarter of 2022 because of the longer shipping routes, says Matt Wright, senior freight analyst at Kpler.

Longer voyages will increase the demand for vessels for diesel delivery.

"We're in for a bumpy ride for 12 weeks as global trade works its way out," said WoodMac's head of oils research, Alan Gelder. "It's going to be much more volatile".