Russia Diesel Seen Trading Still as Europe Prices Flash Shortage

(Bloomberg) -- Europe's diesel market may still be getting shipments of the fuel from Russia that the continent desperately needs -- despite the country's invasion of Ukraine sparking chaos throughout wider oil supply chains.

Five people involved in the European diesel market said on Thursday that Russian supplies of the fuel appear to still be trading. Most said the situation was unclear while several highlighted concerns around the shipping and financing of cargoes.

The situation for diesel appears to mirror that of crude, where tanker companies are leery of touching Russian cargoes until it's clear what the final sanctions response will be to the invasion. But the price of diesel -- now around $150 a barrel -- has risen faster than crude, underscoring traders' anxiety about already low stockpiles, and whether the market can find sufficient alternatives to Russian supplies.

“Product exports from Russia are a big deal,” said Jonathan Leitch, an oil analyst at Turner, Mason & Co. “They would be difficult to replace.”

Russia accounts for a big chunk of Europe's diesel imports, as well as other vital fuels such as naphtha and fuel oil. A significant disruption would have huge implications for global markets, affecting the cost of oil products used for everything from powering cars, trucks, ships and planes to making plastics and even roads.

Although prices are surging, there are as yet no major legal impediments to buying Russian oil product supplies.

See also: Blowout in Diesel's Market Structure Signals More Fuel Inflation

But just like in the crude market, there are signs of disruption to purchasing fuels from Russia. Portugal's Galp -- which imports vacuum gasoil, a refinery feedstock that can be used to make diesel -- is stopping all new purchases of oil products from the country. People involved in refined fuel markets have also reported preferences among buyers for non-Russian product.

“European refiners use vacuum gasoil from Russia to produce diesel and gasoline,” Leitch said. “A lack of VGO would mean secondary units will not be fully fed, reducing the amount of products being supplied locally.”

Likewise, oil tanker companies Torm A/S and Maersk Tankers A/S -- both focused on oil products -- are scaling back their Russia-related activity. The price of transporting fuel from the Baltic to northwest Europe by ship has surged.

It is not just the price of diesel relative to crude oil that is rocketing. The ICE Gasoil prompt spread is in extreme backwardation. At the moment it means diesel for March supply is much more expensive than for the same product to be delivered in April -- a sign of market tightness.

Russia accounted for almost a fifth of the European Union's diesel imports in 2019, according to data from Eurostat compiled by Bloomberg. Supplies are also regularly imported from the Middle East and India, though sharp backwardation in Europe's diesel curve -- and comparatively longer voyages -- weigh on the economics for these shipments.

READ: Russia and Europe's mutual reliance in oil markets

Russia also supplied 14% and 17% of Europe's fuel oil and naphtha imports, respectively, in 2019.

Despite the uncertainty in fuel markets, total loadings of oil products from Primorsk in the Baltic -- about six days sailing to Rotterdam -- and Novorossiysk in the Black Sea were recently scheduled to be only slightly lower this month than last. Primorsk's March diesel shipments are scheduled to be lower year-on-year.