Europe’s Energy Crunch

Europe Has Banned Russian Diesel. The Market Seems Little Concerned

The European Union on Sunday ratcheted up its sanctions against President Vladimir Putin's regime, putting in place a long-planned ban on seaborne imports of Russian fuels.

Whether those efforts will have much effect is another matter. The new rules are designed to limit the impact for both sides, and the biggest winners are likely to be traders and shipping companies.

Source: Bloomberg News analysis of third-party data. A full methodology note is included at the bottom of the page.

Russia has long been the EU's largest foreign supplier of diesel-type fuel, used in heavy machinery and for the transport of goods by road. And while the bloc wants to increase pressure on the Kremlin nearly a year after Russia invaded Ukraine, it doesn't want to exacerbate an energy crisis that has contributed to historic inflation across the region.

Europe Has Been the Biggest Market for Russian Diesel

Direct flows were set to stop with EU ban

Waterborne gasoil/diesel arrivals in EU 27 and UK from Russia Source: Vortexa data, compiled by Bloomberg

As with EU restrictions on Russian crude imposed in December, there’s some wiggle room in the fuels ban.

The EU and Group of Seven have imposed a price cap of $100 a barrel on Russian diesel -- a measure that appears designed to help keep the fuel flowing rather than cut it off. Those wishing to transport Russian fuel to third countries will still be able to access key services, like EU and UK shipping insurance and reinsurance, if they pay below the cap.

While there was some initial concern about the impact of the EU ban, that eased as the bloc hoarded Russian diesel supplies. In the final quarter of last year, imports rose to the highest level since at least the beginning of 2016. Shipments in 2023 -- at least those before the ban took effect on Feb. 5 -- have also been above normal.

Meanwhile, Europe is sourcing diesel from places like the Middle East and North America. It's also possible Russian crude will be processed in non-EU countries, and then shipped into the EU as non-Russian fuel.

Where Will Russia's Diesel Go?

Most barrels that can no longer be sold into Europe will find new homes

Figures are for diesel, all in thousand barrels a day Wood Mackenzie data, compiled by Bloomberg

Russia also doesn't seem too worried about finding a home for its fuel. Planned exports from its key Western ports this month are expected to be about 730,000 barrels a day -- the highest since the start of 2020 -- industry data compiled by Bloomberg show.

It's not clear how that will ultimately play out. Prices for Russian diesel from the Baltic Sea last week were trading at a discount of about 25% to non-Russian imports into northwest Europe, according to figures from Argus Media.

In Europe, the diesel futures' crack spread -- which measures the price of the fuel versus crude -- last week fell to an eight-month low, even as it remains historically elevated. That's an indication that the market doesn't expect an imminent diesel shortage in Europe.

Europe's Diesel Crack Eases

Spread narrowed ahead of EU ban on Russian fuels

Source: Bloomberg Fair Value

“I don't think there's going to be any big crisis,'' I don't think there's going to be any big crisis,“ Dario Scaffardi, former chief executive of refiner Saras SpA, said last week. “The system will find its equilibrium sooner or later. At a cost for everybody, of course.”

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