This Sunday, the EU will follow the example of the US and the UK and stop importing diesel or other refined products from Russia, further reducing dependency on Russian sources.
This boycott is linked to a price cap on refined oil from Russia. This is intended to further reduce Russian income and at the same time prevent the diesel price, which is already high worldwide, from rising further.
The embargo follows the boycott of Russian crude oil imported by sea – both announced in June last year as part of the EU’s sixth boycott package in response to Russia’s brutal incursion into Ukraine.
The uncertainty is great
The crude oil embargo and the associated price cap came into effect on December 5 and did not cause any major upheavals. In contrast, the current ban on refined oil products – and especially diesel, which is in high demand in Germany – has triggered great uncertainty on the market – while domestic diesel stocks are at an all-time low.
Eugene Lindell and Joshua Folds of the energy consultancy FGE point out that diesel is not so easy to replace: “It is very complicated to produce diesel, heating oil and heavy oil, whereas the production of crude oil is simpler and much more variable. After all: there is such a thing a lot of different crude oil on the global market, from which you can refine diesel as well as heavy oil and heating oil.”
Will the embargo drive up the price of diesel?
That will depend heavily on how successful the Europeans are in establishing alternative sources of imports and how resourceful Moscow is in opening up new markets to replace the EU. If both succeed, the pressure on supply and price developments would be low and only short-lived. Otherwise, the boycott could cause significant disruption to diesel-dependent industries, such as transportation and agriculture. Fuel prices would rise and fuel inflation.
Diesel prices have already risen significantly and have remained at a high level for a year and a half. Stocks have shrunk alarmingly because diesel has often been burned as a substitute for LNG, which has become more expensive. Although the situation has eased due to the mild winter so far, the levels in the storage tanks remain worryingly low.
The price of diesel could climb even further in the short term: due to higher transport costs by sea and because other overseas suppliers would have longer routes to Europe. In addition, oil processing in other countries, such as the USA, is more expensive than in Russia.
“The market is very sensitive and scared at the moment,” the FGE analysts told DW. “We have to wait and see how Russian exports are diverted and that there are no lasting disruptions. As soon as the markets realize this, things will calm down.”
Where else could the EU buy diesel?
Before the Ukraine war, the EU got almost half of its diesel imports from Russia. That percentage has been falling over the past 12 months, but it’s still at high levels — and was heading for about 200 million barrels by 2022, according to energy analysts at Vortexa.
The ban now leaves the EU with a deficit of around 600,000 barrels of diesel and other related oil products – per day. The EU wants to fill this gap with imports from the Middle East, Asia and the US. The Union, whose refining capacities are already clearly stretched, has been using these sources for months.
After all, Europe could still benefit from what is known as diesel washing. This is fuel from Russia that is blended with diesel from other countries, such as Turkey, and then shipped to the EU.
And what about India and China?
These two countries, which have become the top buyers of Russian diesel over the past year, could play an important role in imports into the EU.
India’s diesel exports to Europe have surged since winning the war, when its refiners have benefited from their own low storage costs and lower crude oil prices amid rising diesel costs. The strikes in the French refinery industry appeared like a sign on the wall, as a result of which the thirst for diesel from India increased. A country that is not a traditional supplier.
China has increased its first export quotas this year for diesel and related products, which had risen significantly earlier. This indicates that exports should be kept at this high level and that capacities of other producers could also be directed to Europe as a result.
“China’s policies could change the whole market,” says Mark Williams, research director at Wood Mackenzie, adding that the country “holds the key to global refining capacity.”
Who then still uses Putin’s diesel?
Russia has managed to keep its crude oil exports high. And with the help of India and China, who were able to divert the crude oil that was actually intended for Europe into their tanks at generous price reductions. However, the diversion of exports to these new markets poses a major risk for Moscow: the two countries, now the largest buyers, hold large refining capacities themselves. Experts therefore expect that Russia would prefer to export its diesel to Turkey, Latin America and Africa.
“Russia,” says Eugene Lidell, “is already forced to offer its diesel at hefty discounts to make it palatable to people who don’t really need the fuel.”
Lidell, who heads FGE’s refined products division, expects a huge supply of Russian diesel to arrive in Turkey, where it will be blended and sold to Europe as “Turkish diesel”. The country on the Bosporus has been recording an increase in imports from Russia for months.
“These countries are willing to step in and buy discounted diesel,” says Lidell. That’s why FGE doesn’t expect Russia’s oil exports to slump this year. Other experts, on the other hand, suspect that Moscow will find it difficult to find new buyers and may be forced to restrict exports.
What could the price cap bring?
The price cap is intended to help Moscow continue to sell diesel and related products to third countries while preventing large price jumps. With its help, European insurers and shipping companies can continue to transport Russian oil products to third countries – as long as these fuels are traded below or at most at the agreed maximum price.
The cap would have little impact on Russian refining capacity. According to Wood Mackenzie’s Mark Williams, the trading price of around $40 a barrel of refined oil would still be “strong. At that level, Russian refiners are still doing well, so the incentive to process crude oil is always high.”
The price cap reflects a comparable measure that was also implemented for Russian crude oil. This “crude oil cap” kept the price at $60 a barrel and allowed Moscow to continue selling oil – but only at the intended discounts. That’s how it was supposed to be.
This article has been adapted from English