European Diesel Market Remains Tight Despite Increased Refined Oil Imports and Embargo on Russian Oil

The European diesel market remains tight despite the EU’s efforts to bolster its refined oil imports ahead of the embargo that began on 5 February. The EU increased its imports of refined oil products significantly towards the turn of the year, reflecting more trade with the Middle East and Asia as well as a frontloading of fuel oil and diesel imports from Russia ahead of the embargo. However, Europe’s dependence on Russian diesel has led to persistent worries about supply shortages, as reflected in a sharp increase in the spread between diesel and crude oil prices, also known as the “diesel crack spread,” since the start of the Russian war in Ukraine.

The latest observations on 14 March 2023 show that the European diesel market remains tight, with crack spreads higher than before the onset of the war (Chart C, panel b). Despite a global fall in diesel prices following from a recovery in inventories, crack spreads narrowed in the weeks around 5 February, suggesting that the initial decline was anticipated by the market.

A stronger impact of sanctions on global oil markets could still materialize. The price cap on crude oil might have a more significant effect on Russian crude oil exports in the coming months as sanctioning partners aim to keep the level of the cap at least 5% below the market price for Russian oil. Future reassessments of the price cap level could test whether the sanctions are working as intended, particularly as Russia officially prohibited exports of oil to countries that join the cap mechanism as of February. Russia has already announced a reduction in oil production starting in March 2023 in response to the implementation of the sanctions, corresponding to around 0.5% of global crude oil supply.

The embargo and corresponding price cap mechanism on refined oil products are still in the early phase of implementation, implying that there is still high uncertainty about the ultimate impact on refined oil product markets. Over time, the embargo may add additional price pressures in an already tight European diesel market, with the EU having to bid for barrels of diesel from the United States and the Middle East in competition with those suppliers’ traditional customers.

Refined oil products include diesel and gasoil, gasoline components, jet fuel, kerosene, and naphtha. Crack spreads are the difference between the prices of crude oil and the corresponding refined oil product. The latest observations are for 14 March 2023 for both panels, sourced from Refinitiv and ECB staff calculations.

It is worth noting that small amounts of crude oil were still arriving in Bulgaria, which is temporarily exempt from the embargo. It is likely that exports to other EU countries after 5 December are related to implementation exemptions as ships loaded before the embargo date could still deliver Russian oil. The G7, the EU, and Australia together form the Price Cap Coalition, while Albania, Bosnia and Herzegovina, Iceland, Liechtenstein, Montenegro, North Macedonia, Norway, Switzerland, and Ukraine have all pledged to follow EU sanctions against Russia.

In terms of pricing, the focus is on the price without freight and insurance costs since the price cap refers to the price excluding transportation costs. In particular, the prices for Urals crude oil given here are free-on-board in Primorsk prices as quoted by Refinitiv. The implementation of the price cap on refined oil includes a 55-day wind-down period for seaborne Russian petroleum products purchased above the price cap, provided they are loaded onto a vessel at the port of loading before 5 February 2023 and unloaded at the final port of destination before 1 April 2023.

Sources: Refinitiv and ECB staff calculations. Weekly snapshot – Russian fossil fuels 6 to 12 February 2023 by the Centre for Research on Energy and Clean Air.

Leave a Reply

Your email address will not be published. Required fields are marked *