In an effort to sever its energy links with Moscow, which had served as its main energy supplier for years, the European Union has joined the United States and the United Kingdom in outlawing the import of Russian diesel and other refined oil products.
The EU fuel embargo is combined with a price cap on Russian refined fuel in an effort to affect Russian revenue without raising already high global diesel costs.
The embargo on oil products was declared in June as part of the EU’s sixth round of sanctions against Russia in response to Moscow’s “brutal and unprovoked attack on Ukraine.” The ban on Russian crude oil imported by sea was also announced two months prior.
The oil embargo and price cap that went into effect on December 5 didn’t cause any significant problems, but the ban on refined fuels, particularly diesel because of its widespread industrial and domestic use, has created uncertainty in the market at a time when European diesel stocks are at an all-time low.
“The crude is more fungible,” said Eugene Lindell and Joshua Folds from FGE energy consultancy. “It’s much more difficult to produce diesel/gasoil whereas, for crude oil, the upstream production is much more varied on a global scale. There’s a lot more kind of crude in the market and there potentially is diesel/gasoil,” they told DW.
That would primarily depend on how effectively Moscow finds other markets for its fuel shunned by the EU and how successfully the European nations find substitute sellers to help fill the hole produced by the boycott. The effects on supply and prices would be minor and transient if those two things happened.
If not, the punishment could cause significant disruptions in sectors that depend on diesel, like transportation and agriculture, and higher fuel prices would make the fight against inflation much more difficult.
Diesel prices, which had already been stubbornly high for the previous 18 months, are now rising due to the perceived inconvenience. Due to a mild winter, the situation has eased recently, but diesel storage levels are still uncomfortably high.
Due to the requirement for supplies to come from farther away places, greater production costs in nations like the US, and the risk premium, diesel prices may rise even more in the near future.
“The market is very sensitive right now and very worried,” the FGE analysts told DW. “The world still has to see that those Russian flows do get rerouted and that there is not a sustainable disruption to Russian flows. Once the market recognizes that, then the risk premium and the sentiment levels should go lower.”
Before Russia invaded Ukraine on February 24, 2022, the EU depended on Russia for about half of its diesel needs. According to energy analytics company Vortexa, this share decreased over the past year but remained sizeable as EU countries purchased more than 200 million barrels of diesel in 2017.
In reality, the EU upped its purchases from the nation in the run-up to the embargo to prepare for weaning itself off Russian gasoline. Kevin Wright, an analyst with energy data firm Kpler, called this the “final hurrah” before the embargo took effect. He stated in an analysis on Kpler’s website that this was “the last opportunity to buy from the nearest significant source, keeping freight prices down compared to suppliers from further afield.”
The prohibition has caused a daily shortage of around 600,000 barrels of diesel and related oil products in the EU, which it plans to fill with increased imports from the US, Middle East, and Asia. The EU has already been relying on such regions over the last months to make up for the shortage, with its own refining capacity under pressure.
With the expansion of significant refineries like the Al-Zour facility in Kuwait and the Jazan refinery in Saudi Arabia, that dependence is only expected to grow. Additionally, Germany and the UAE’s Abu Dhabi National Oil Co. signed a contract under which the oil company will supply 250,000 tonnes of fuel per month beginning in 2023.