Europe Hopes Latest Limit on Russian Energy Is a Nonevent --- Inflation worries brew as EU cuts off more imports from Moscow

"Europe is weaning itself off Russian oil and gas in steps. The next phase, targeting oil products such as diesel and jet fuel, could bring fresh snags for buyers and fat profits for refiners.

This weekend, the European Union stopped importing petroleum products from Russia. This follows a ban on shipments of crude oil that came in early December, and before that, August's coal embargo.

The crude ban was a nonevent, despite some trepidation. Instead of reducing global supply and causing prices to rise, Russian oil that used to go to the EU was rerouted to India and China. A similar reshuffle may now happen for refined products and Russian fuel destined for Europe will instead flow to Latin America and Africa.

However, the market doesn't look as prepared for this ban as it was for crude, particularly for diesel. Europe gets over half its diesel imports from Russia, and so far, little has been redirected. Two weeks before the crude-oil embargo deadline on Dec. 5, around 50% of flows to Europe had already been rerouted, which minimized disruption when the ban kicked in. Two weeks ago, only 10% of diesel flows had found a new home, based on a Goldman Sachs analysis.

It could be a sign that it is physically more difficult to find new markets for refined-oil products than for crude.

"Russian diesel will need to travel much further," says Alan Gelder, vice president of refining at consulting firm Wood Mackenzie. "If there is a constraint, it will be in shipping."

While the Kremlin has been able to use the unofficial fleet that transports the oil of sanctioned countries such as Iran, there isn't the same kind of network for petroleum products.

Europe's diesel crack spreads, which track the difference between the price of crude oil and the cost of diesel, have been volatile lately. The spread is currently around $33 a barrel, down from $48 late last month. The fall in recent days may be a sign that traders don't expect the ban to be as disruptive as feared, but crack spreads are still more than double the levels before the latest round of sanctions, based on data from S&P Global.

If Russian diesel can't make it to new markets, freeing up other supplies for Europe, a shortage would cause another bout of energy inflation for European consumers. As EU environmental regulations motivated diesel vehicles for years, roughly 40% of the passenger cars on European roads run on the fuel, compared with less than 10% in the U.S., where diesel is mainly used for industrial transport. Jet fuel also may become more expensive.

In this scenario, the winners would be refiners that already enjoyed bumper profits last year. Stocks such as Tupras and Saras have gained 11% and 28%, respectively, this year as investors anticipate fat margins. U.S.-based refiners like Valero also would benefit, particularly as they have lower energy bills than their European competitors. Europe's integrated oil majors such as Shell and BP don't typically have much exposure to refining, although Spain's Repsol is an exception, with about 30% of its earnings coming from the activity.

Almost a year after the unprecedented sanctions on Russia began, the EU is making progress with its Russian energy detox -- although, ironically, it is buying more liquefied natural gas than ever from the country to replace the pipeline flows the sanctions shut off last summer. Hopefully for the global economy, the region will respond as well to the latest stress test as it did to the last one. If it doesn't, refiners can offer investors a hedge.” [1]

 

In that case, buyers will be left with even emptier pockets and hungrier.

 

1.  Europe Hopes Latest Limit on Russian Energy Is a Nonevent --- Inflation worries brew as EU cuts off more imports from Moscow
Ryan, Carol.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 06 Feb 2023: B.10.