How the EU embargo on Russian ‘diesel’ could affect fuel prices in the coming months

How the EU embargo on Russian 'diesel' could affect fuel prices in the coming months

Europe is taking another major step to cut energy ties with Russia by banning the import of diesel and other products made from crude oil into Russian refineries.

The European Union (EU) ban, which takes effect on February 5 following the embargo on coal and most oil from Russia, aims to end the invading country’s energy consumption and weaken the Kremlin as the anniversary of the invasion of Ukraine is approaching.

However, the most recent ban carries some risks globally, which several countries have faced. Since the invasion of Ukraine began on February 24, 2022, diesel prices have changed a lot and may continue to rise.

Most of the products we consume are transported by trucks, which usually run on diesel fundamental fuel for the global economy, serving everyoneas well as agricultural machinery, city buses and industrial equipment. And thenWhen the cost of diesel rises, this inflation is reflected in the prices of all products.

Europe stops imports of refined products total about one million barrels per day and half of those barrels will be low-sulphur, high-calorific gas oil. It is initiative This is not surprising, as Rystad Energy, a Norwegian think tank specializing in strategic studies of the sector, had already issued a warning in May about the shortcomings of a European market dependent on Russia.

As total European demand for diesel is between 6 and 7 million barrels per day, demand could be affected by 8% overnight, which could lead to Europe consuming refined products from India, the Middle East and China is going to make it, but at a higher cost.

Will European sanctions drive up diesel prices?

It will depend. Diesel, like crude oil, is sold worldwide and Europe can look for new sources, such as the United States of America (USA), India or countries in the Middle East. If it works, the effect on prices may only be temporary and not as pronounced.

However, it should be noted that Europe has already reduced imports of Russian diesel by almost half, from 50% of total pre-war imports to 27%. As for U.S. suppliers, they have increased shipments to record levels, from 34,000 barrels per day in early 2022 to 237,000 barrels per day so far in January, according to S&P Global.

The EU’s top energy official Kadri Simson argued that markets had time to adjust after the ban was announced in June, an idea that Europeans appear to have followed as they stocked up on Russian diesel ahead of schedule as imports increased last month.

Faced with these fluctuations, the G7 advocates imposing a price cap on Russian diesel for other countries, as happened with Russian crude, which continues to flow to world markets, but with less revenue from Moscow.

If this measure works, global diesel flows should be reorganized, with Europe finding new suppliers and Russian diesel new customers, without a major loss of supply. However, it is difficult to predict how the limit will work without knowing whether the price will be fixed and whether Russia will retaliate against shipments.

“The restrictions on Russian exports, if they come, will of course create problems in this whole rebuilding process,” explains S&P Global Commodity Insights’ head of fuels and refining research for Europe Hedi Grati, adding: “Europe would compete with other large importers and that would put upward pressure on prices”.

If the limit does not block large volumes of Russian diesel, there could be “a short-lived price spike” as the market adjusts, as tankers would have to make a longer journey to Europe from the US, Middle East or India rather than departing from Russian ports on the Baltic Sea.

Despite the scenario being uncertain and questionable, a year after the invasion of Ukraine began, Kuwait and Saudi Arabia will launch a massive new refining capacity at the end of this year, which will also happen in Oman in 2024. further alleviation of any pressure points arising from this separation from Russia,” said Grati.

The military offensive is justified by Putin with the need to “denazify” and demilitarize Ukraine for Russia’s security. This invasion was condemned by the international community at large, which responded by sending weapons to Ukraine and imposing political and economic sanctions on Russia.