How the EU embargo on Russian diesel could affect fuel prices in the coming months

Europe is taking another big step to cut energy ties with Russia by banning the import of diesel and other products made from crude oil to Russian refineries.

The European Union (EU) ban, which comes into effect on February 5 following its embargo on coal and most oil from Russia, aims to try to end the invading country’s energy use and weaken the Kremlin as the anniversary of the invasion of Ukraine approaches.

However, the latest ban poses some global risks that several countries are facing. Since the start of the invasion of Ukraine on February 24, 2022, diesel prices have changed sharply and may continue to rise.

Most of the products we consume are transported by trucks, which run mainly on diesel, which makes it essential fuel for the global economy, serving everyoneas well as agricultural equipment, city buses and industrial equipment. So whatWhen the cost of diesel increases, this inflation is reflected in the prices of all products.

Europe will be suspended the import of refined products for a total of about one million barrels per day, and half of those barrels will be low-sulfur high-calorific gas oil. is initiative This is not surprising, given that in May, Rystad Energy, a Norwegian think tank specializing in strategic studies of the sector, had already warned of the weaknesses of a European market dependent on Russia.

With total European demand for diesel between 6 and 7 million barrels per day, demand could be affected by 8% overnight, which could lead Europe to seek refined supplies from India, the Middle East and China, but at a higher cost.

Will European sanctions drive up diesel prices?

Will depend on. Diesel, like crude oil, is sold worldwide and Europe can look to new sources such as the United States of America (US), India or Middle Eastern countries. If it works, the impact on prices may only be temporary and not that severe.

However, it should be noted that Europe has already reduced its imports of Russian diesel by almost half, from 50% of total imports before the war to 27%. As for U.S. suppliers, they have increased shipments to record levels, from 34,000 bpd in early 2022 to 237,000 bpd so far in January, according to S&P Global.

The EU’s top energy official, Kadri Simson, argued that markets had time to adjust after the ban was announced in June, an idea the Europeans appear to have followed when they procured Russian diesel ahead of schedule, with imports rising last year. month.

Faced with these fluctuations, the G7 advocates imposing a price cap on Russian diesel for other countries, as it did for Russian crude oil, which continues to flow on world markets but with less revenue from Moscow.

If this measure works, global diesel flows should be reorganized, with Europe finding new suppliers and Russia new customers, without a significant supply loss. However, it is difficult to predict how the cap will work without knowing whether the price will be set and whether Russia will reciprocate the shipments.

“The restrictions on Russian exports, if they happen, will of course cause some problems in this whole restructuring process,” explained S&P Global Commodity Insights head of fuel and refining research for Europe Hedi Grati, adding: “Europe would be competitive with other major importers and this would put upward pressure on prices.”

If the cap does not block large quantities of Russian diesel, there could be “a short-lived price spike” as the market adjusts, with tankers having to make a longer journey to Europe from the US, the Middle East or India rather than depart from Russian ports in the Baltic Sea.

Although the scenario is uncertain and questionable, a year after the start of the invasion of Ukraine, Kuwait and Saudi Arabia are set to launch a massive new refining capacity at the end of this year, which will also happen in Oman in 2024 .to further alleviate any pressure points arising from this divorce from Russia,” according to Grati.

The military attack is justified by Putin with the need to “de-nationalize” and demilitarize Ukraine for Russia’s security. This invasion was condemned by the international community at large, which responded by sending weapons to Ukraine and imposing political and economic sanctions on Russia.

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