Global Fuel Supply Faces Severe Penalties Ahead

In a matter of weeks, a large portion of the world's diesel market, which is a major factor in the global economy, will be subject to strict sanctions.
Beginning on February 5th, the European Union, the G-7, and their allies will attempt to limit the cost of Russia's fuel exports as a consequence for their invasion of Ukraine. This will be accompanied by the European Union's ban on nearly all imports of Russian oil products.

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Regulations have already been implemented on the nation's crude exports, but it is the limitation and prohibition of refined fuels, particularly diesel, that has some oil-market analysts worried about the possibility of price increases.

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Before its incursion into Ukraine, Russia was the biggest external provider of fuel to Europe, and the continent has kept up with large purchases up until the cutoff. Consequently, the sanctions are likely to cause a major shift in the flow of diesel around the world, with Russia's new crude purchasers sending fuel back to Europe. In the short-term, there is a possibility of higher prices.

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Keshav Lohiya, founder of consultant Oilytics, noted that the absence of Russian barrels is a major issue and replacing them will be a difficult task. However, the market appears to be less anxious as markets and trade flows have been able to cope. He added that this will require a new way of transporting diesel.
The European Union is facing a need to replace around 600,000 barrels of diesel imports per day, which means that Russia must look for new customers for those supplies, store the fuel on vessels, or reduce production at its refineries.

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The US and India have seen an increase in shipments to the EU due to their production of more than they consume, allowing them to export the excess. China is also predicted to send more of the fuel to its neighboring countries, which could lead to more cargoes from other suppliers being sent to Europe.
Bernstein analysts, including Oswald Clint, have noted in a note to clients that product flows from net-long regions will become more intense as the embargo on Russian products in the continent is set to begin on February 5th, which is expected to further exacerbate the already tight diesel situation.

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India has made a significant contribution to Europe's supply of oil since the war began, as it has become one of the largest purchasers of discounted Russian crude.
A substantial rise in the amount of diesel imported from India would almost certainly mean that Russian crude is being bought, processed into diesel, and then resold to Europe.

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The European Union's sanctions are unlikely to completely prevent Russian oil from reaching Europe.
This type of trade would not violate the EU's regulations, but it does demonstrate the inefficiency of the sanctions. In essence, hydrocarbons will have to travel much farther than usual, and then return to their original destination.

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It is possible that some less-than-ethical practices may be employed, such as altering paperwork for shipments or transporting fuel to other areas to be mixed with non-Russian products.
The winter season has not been as bad as initially predicted in terms of oil scarcity. Diesel, which had been a major factor in the oil market's strength, has become less of a factor due to the warmer-than-usual weather and an increase in supply in Europe.
Oil prices decreased after sanctions on Russia seemed to redirect exports instead of reducing them.

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Traders from Africa, Latin America, and potentially Asia will be among the new or larger purchasers of Moscow's goods. Europe, on the other hand, is likely to look to the Middle East, where massive refineries are increasing their production.
This week, Energy Aspects Ltd. reported that only a third of Russia's diesel exports will be able to find a market, while the remainder will have to be stored.
At the Global UAE Energy Forum, hosted virtually by Gulf Intelligence, Amrita Sen, the consultant's chief oil analyst, commented that the product embargo is a difficult issue to tackle. She noted that Russia has had difficulty finding buyers for its diesel outside of Europe.

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The European refining industry is preparing for its annual maintenance period and is also dealing with disruptions.
The possibility of strikes in France could lead to the closure of some of the country's fuel producers the day after the sanctions against Russia take effect.
Two oil refineries located in eastern Germany, which were previously supplied with Russian crude through pipelines, are now producing less fuel than usual due to the interruption of these flows.

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In addition, there are a variety of logistical and technical issues that could arise unexpectedly.
The market for war insurance for ships visiting Russia is still in a state of turmoil after some of the major reinsurers pulled back their coverage. Additionally, the cost of oil tankers has already increased in anticipation of the sanctions on crude oil.

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At the moment, there is no indication of alarm in the oil industry. The main inquiry in the upcoming weeks is whether enough effort can be put forth to alter the global diesel supply.
Eugene Lindell, the head of refined products at consultant FGE, declared that the market will always find a solution. He then questioned how much suffering it will cause.