Global Diesel Prices Surge Amid New US Sanctions on Russia

By Ahmad Ghaddar, Shariq Khan, Trixie Yap and Enes Tunagur

LONDON - Recent U.S. sanctions targeting Russia's oil trade have led to a significant increase in global diesel prices and refining margins. Analysts report that these sanctions have raised concerns about tighter supplies in the market.

On January 10, the United States implemented its most stringent sanctions on Russian oil producers and tankers. This move aims to limit the revenue of Russia, the world's second-largest oil exporter, amidst its ongoing conflict in Ukraine.

The sanctions specifically target a number of ships that are considered part of a shadow fleet, which attempts to bypass Western restrictions. Many of these vessels have been involved in transporting oil to countries like India and China. These nations have been enjoying low-priced Russian oil following Europe's ban on Russian imports after the invasion of Ukraine.

Energy analyst Natalia Losada from Energy Aspects noted, "Diesel profit margins are climbing following news of the sanctions, and we anticipate notable disruptions to Russian diesel exports." She indicated that at least 150,000 barrels per day of diesel exports from major Russian refineries, like Gazprom Neft and Surgutneftegas, are currently at risk.

The European diesel benchmark's premium for nearby contracts surged to $50.25 per metric ton, a figure not seen in ten months, according to LSEG data. The diesel market was already in a state known as backwardation, where short-term contracts are more expensive than those for longer delivery times, signifying a supply crunch.

As of Thursday, diesel refining margins reached a five-and-a-half month peak of $20 per barrel, with cold weather in the northern hemisphere further boosting diesel demand.

In Asia, diesel refining margins increased by 8% on January 10, surpassing $17 a barrel—the largest rise since September—before leveling off to approximately $16.50 per barrel. U.S. diesel futures also soared by over 5% on January 10, marking their largest daily increase since October, reaching a six-month high of $111 per barrel. The front-month diesel contracts are trading at over a $10 premium compared to contracts for six months later, which is the highest premium in nearly a year.

Traders and refiners in the region are adjusting their fuel prices in response to the rising crude costs. Although lower Russian diesel exports may not directly disrupt Asian markets, according to sources in Singapore, the overall complex refining margins in Asia have weakened as crude prices have escalated more rapidly than refined product prices.

Dubai cash prices jumped by 8.5% since last Friday, while Singapore's February gasoil swaps only saw a 5.5% increase during the same period. Singapore's complex refining margins, a key indicator for the region, hovered at about 17 cents per barrel, close to the lowest point in five months.

Europe, which used to be the largest importer of Russian diesel before 2022 sanctions, has shifted towards sourcing diesel from India, the Middle East, and the United States to fill the supply gaps created by the sanctions. However, concerns linger that the sanctions may disrupt refinery operations in India and China, potentially reducing their diesel output and exports to Europe, noted James Noel-Beswick, an analyst at Sparta Commodities.

Countries like Turkey and Brazil, major diesel importers from Russia, will need to look for alternative suppliers such as the U.S. and Middle Eastern nations if Russian exports face significant disruptions, which would heighten competition for European buyers.

Despite the challenges posed by the new sanctions, some analysts believe that the market will eventually acclimatize to these changes. Eugene Lindell from FGE Energy remarked, "We don't expect to observe major shifts in Russian product flows, as similar volumes can still be transported to the same destinations using non-sanctioned tankers."

diesel, sanctions, prices