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Global Market Analysis, 12 August 2022

This week's Global Market Analysis takes a look at Europe's reliance on Russian diesel as consumers struggle to wean themselves off, and in the US, pipeline and jet markets are buoyed by a rise in demand.

Europe's biggest diesel consumers struggle to wean themselves off Russia

By David Elward and Nakul Hirani

Europe's reliance on Russian diesel supply is as strong as it's ever been. According to Kpler tanker tracking, the region imported more than 3.6mn MT or some 900,000 b/d last month – figures comfortably at the upper end of historic monthly levels.

At the same time, diesel prices have been bullish. Crack spreads for the Northwest Europe ULSD CIF cargo market have been around $40/b this week, according to General Index data. While this is lower than in the aftermath of Russia’s invasion of Ukraine at the end of February, when the market at one point topped $87/b and later spent time in the $70s and $60s, it’s still high by past standards. Prices have gone from “mind-blowing to amazing”, as Bloomberg recently put it.

The high pricing and persistent flows of Russian diesel to Europe are inextricably linked. The global supply chain for distillates is tight. Capacity was only just about keeping pace with demand prior to the decisions by oil companies and traders operating in Europe to “self-sanction” away from Russian origin fuel and then more formal import bans announced by the UK and EU to take effect from early 2023. China limiting its own refiners from exporting has been another a key factor reducing availability, keeping prices supported.

In this context, with no easy alternative supplier to make the substitution for in excess of 700,000 b/d in one fell swoop – and imports from Russia not actually yet illegal just frowned upon – the headline figure of Russian diesel/gasoil imported into Europe is not entirely surprising, even if it is still striking.

But dig a little deeper and signs of the shift away from Russian origin are visible.

General Index analysed Kpler tanker tracking data for gasoil/diesel imports from Russia into 12 of Europe’s largest importing nations since the Russia-Ukraine conflict began. Using February (the month of the invasion) as a baseline, we calculated an imports index for the subsequent flows (March-July). A trend below 0.00% would indicate a reduction in imports from Russia vs February levels, while a trend above would indicate imports rising. All countries except Turkey have signed up to a ban on imports, so the index can give us an idea of how far along the 11 countries are in the stated goal of eliminating Russian imports.

In Northwest Europe, the UK has moved the fastest, slashing monthly imports by close to 70% on average since February. In June, supply into the UK from Russia was almost cut off entirely, falling to just 9,000 b/d vs Feb’s 162,000 b/d. Belgium, Poland and France have also made strides to cut their dependency. For France – the world’s largest diesel importer and the biggest recipient pre-crisis of Russian fuel – imports dropped to around 130,000 b/d in July from a high of 186,000 b/d in April. Smaller importing countries which don’t feature in the charts such as Denmark, Ireland and Finland have already turned off the pumps completely since Feb/Mar. Faring less well on the trajectory to zero Russian origin are Germany, Romania and the Netherlands. The latter has absorbed some excess Russian barrels into the Amsterdam/Rotterdam refining and storage hub to be blended with other origins. In Germany, imports have climbed from a May low of 65,000 b/d to 120,000 b/d last month.

General Index NWE Gasoil/Diesel Imports

In the Mediterranean, Turkey ranks as one of the largest diesel importers. Broadly unencumbered by the bans and self-sanctioning imposed elsewhere in the region, it has been free to soak up the Russian diesel others don’t want. Imports of 168,000 b/d in July in fact made Turkey the biggest-single recipient of Russian distillate across Europe as a whole that month. For Romania and Italy, imports peaked at 64,000 b/d during the period in question, in March and June, respectively. Spain’s imports for the five months averaged 57% more than February, peaking at 65,000 b/d in July. In Slovenia, imports peaked at 48,000 b/d in June before falling back to February levels.

General Index, MED Gasoil/Diesel Imports

Several months’ lead time before the implementation of import bans at state level has delayed Europe’s diesel divorce from Russia. Public outrage which drove a wave of self-sanctioning has subsided from its early peak. Suppliers have continued to place Russian fuel in Europe, and some will have benefitted from steep discounts for Russian product vs other origins. General Index has been assessing the ULSD CIF NWE Cargoes Russia Inclusive vs Open Origin spread at a discount of $90-$100/MT in recent days.

If the import ban deadline is to be met and not pushed back, the second half of this year will require a rebalancing of trade flows at a pace and scale the market hasn’t seen before. Diesel cracks at $87/b again and higher to make it happen? You wouldn’t rule anything out.

US fuels buoyed by Gulf-to-East gasoline arb, jet demand rallies to pre-pandemic high

By Jeffrey Bair

US fuel markets just got a lift on two fronts: rising demand for pipeline time and more jet fuel getting out to airports.

Traders were paying nearly 17 cents a gallon extra Thursday afternoon to place their gasoline for prompt loading on Colonial Pipeline, the main route for fuel from Houston to New York. It was the highest premium to move gasoline in at least five years.

Interest in shipping points to a heathy arbitrage for gasoline across nearly one-third of the US. Traders are trying to take advantage of stout New York pricing, and a better East Coast pipeline arb usually eventually draws more cargoes across the Atlantic.

General Index, US Jet Demand

At the same time, the moving average for jet fuel supplied, the best proxy for travel demand, got to its highest level since a few months before the pandemic started in March 2020. The boost signals better health for the oil sector hardest hit by the pandemic.

David Elward, Senior Pricing Analyst
David Elward, Senior Pricing Analyst
Nakul Hirani, Energy Analyst
Jeffrey Baird, U.S. Refined Products Pricing Director
Jeffrey Bair, Americas Refined Products Pricing Director
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