The approaching EU embargoes on imports of Russian crude oil and petroleum products, as well as a ban on seaborne services, will add further pressure to the global oil balance, especially on the already tight diesel markets, the International Energy Agency (IEA) said in its November oil market report. The agency also noted that the proposed oil-price cap may help alleviate tensions, but myriad uncertainties and logistical problems remain.
Diesel prices and cracks (differential to crude oil price) soared to record levels in October 2022 and are now 70% and 425% above year-ago levels, respectively, while benchmark Brent crude prices are up just 11% over the same period. Distillate inventories are at multi-decade lows. French refinery strikes last month, and a looming embargo, pushed diesel prices in Rotterdam, Europe's main trading hub, to more than $80/bbl above North Sea dated Brent at one point before easing somewhat. Diesel premiums in the US also surged ahead of the winter heating season in the Northeast.
“High diesel prices are fueling inflation, adding pressure on the global economy and world oil demand, which is now expected to contract by 240,000 b/d in fourth-quarter 2022. Demand is forecast to expand by 2.1 million b/d in 2022 before slowing to 1.6 million b/d [of expansion] next year. Growth will come from jet fuel and LPG-ethane for petrochemicals. But global diesel-gasoil growth is forecast to ease from 1.5 million b/d in 2021, to 400,000 b/d in 2022 before posting a small decline in 2023 under the weight of persistently high prices, a slowing economy and despite increased gas-to-oil switching,” IEA said.
“Diesel markets were already in deficit before Russia’s invasion of Ukraine due to the closure of 3.5 million b/d refinery distillation capacity since the start of the Covid-19 pandemic, resulting in a net decline of 1 million b/d. With the post-pandemic recovery in 2021, demand jumped for diesel and gasoil, the main engines of industrial activity and economic growth. Lower Chinese product exports also tightened the market, but a recent change in policy is making more diesel available. A net 2.7 million b/d of new distillation capacity is slated to come online globally from fourth-quarter 2022 to end-2023, which could offset lower exports from Russia following the embargo.”
By October 2022, EU countries had reduced Russian crude oil imports by 1.1 million b/d to 1.4 million b/d, and diesel flows by 50,000 b/d to 560,000 b/d. When the crude and product embargoes come into full force in December and February, respectively, an additional 1.1 million b/d of crude and 1 million b/d of diesel, naphtha, and fuel oil will have to be replaced.
“For crude oil, no significant buying from Russia outside China, India, and Turkey has appeared despite massive discounts. A further rerouting of trade should help ease pressures, but a shortage of tankers is a major concern, especially for ice-class vessels required to load out of Baltic ports during winter,” IEA said.
“The competition for non-Russian diesel barrels will be fierce, with EU countries having to bid cargoes from the US, Middle East, and India away from their traditional buyers. Increased refinery capacity will eventually help ease diesel tensions. However, until then, if prices go too high, further demand destruction may be inevitable for the market imbalances to clear.”