European diesel buyers are willing to pay more for Russian cargoes than they were in May, as traders look to get their hands on supplies ahead of a difficult winter and global shortage of the fuel, industry sources said.
The European Union will stop buying all Russian crude oil delivered by sea from early December and will ban all Russian refined products two months later, to curb Russia’s oil-export revenue in response to Moscow’s invasion of Ukraine.
A number of large oil firms have already stopped buying from Russia following the invasion, which Moscow calls a “special military operation”.
As demand fell for Russian diesel, its discount to the fuel produced elsewhere reached $30 a tonne by May.
But the discount has since narrowed to around $6 a tonne in northwest Europe and $10 a tonne in the Mediterranean as demand for the fuel has risen, three trading sources said.
Diesel cargo prices and barge prices in northwest Europe have fallen by around 20% since May, according to Refinitiv Eikon. But traders still attributed the narrower discount of Russian diesel compared to non-Russian fuel to higher demand.
“Those that can, will buy Russian and stockpile. Gas-to-oil switching has added to demand and we’re switching to winter diesel. This is one of the factors why Russian stuff is not as cheap as it used to be,” one European trader said.
The Netherlands is buying millions of barrels of non-Russian diesel as it seeks to safeguard winter energy supplies. Two tenders were posted by the Netherlands Petroleum Stockpiling Agency last week seeking 2.8 million barrels of EN-590 Dutch Winter Grade diesel. They are to be delivered to storage facilities in Amsterdam by the end of the year.
Smaller discounts of Russian diesel to fuel produced elsewhere only safeguard Russia’s earnings ahead of sanctions. Top Russian oil producer Rosneft on Thursday posted a 13% rise in half-year net profit helped by tight cost controls.
The Group of Seven (G7) plans to implement a price cap on Russian crude and refined products.
Europe relies heavily on Russian diesel for a winter specification which can withstand cold weather conditions.
The specification change comes into force in Europe in November but some firms want to buy the product as early as August to replenish tanks, one Mediterranean diesel trader said.
Although it has declined, Russian diesel continues to make up the largest portion of European imports at 44% this month, data from Vortexa show.
“Immediate supply is no concern but if (refinery) turnarounds are prolonged or not coming back according to plan, the winter might be a challenge,” one European trader said.
Those that are unable to buy Russian diesel will likely look to the United States and China for winter-specification diesel, traders said. China is expected to issue a fifth batch of refined fuel export quotas for 2022 in the fourth quarter, which could add global fuel supply.
The diesel futures market remains in backwardation, where current prices trade at a premium to prices for future deliveries. This makes it uneconomical for traders to put diesel into storage and book a profit.
As a result, stocks of diesel and gasoil in northwest Europe are well below seasonal levels.
But recent volatility in the backwardation has prompted “market speculation” and there has been a recent pickup in demand to rent diesel storage space, one industry source said on condition of anonymity.
“People that have tanks are holding on even if they are empty, because if you give it away, you never get it back,” the source said, adding there is little free storage available to rent across northwest Europe.
“There is a bit of concern on how to survive the winter,” one trader said.