Before the Ukraine War, the EU depended on Russia for diesel as well as natural gas. It banned seaborne imports of Russian diesel on February 5. That prompted predictions of a supply crunch. Instead, diesel prices and refining margins have dropped. That is counter-intuitive.
Europe does not make enough of its own diesel. The continent has a structural shortage of some 1.4mn barrels daily, against production of about 5mn. Russian diesel once filled half that gap. Any disruption to supplies should lift local diesel prices and shares in European refiners. These include biodiesel specialist Neste Oil of Finland and Spain’s Repsol. No rally has materialised.
Tanker journeys have lengthened, however. Russian oil companies are sending more supplies to Latin America and Africa. Europe has replaced Russia’s imports with diesel from Asia and the Middle East. The Baltic clean tanker index has jumped 68 per cent since the February ban came into force.
Diesel refining margins have dropped, despite longer voyages. The differential between diesel and crude prices — known as the crack spread — is near one-year lows of around $19 a barrel, according to Bloomberg’s ICE data. At the end of January the spread was around $44.
There are three possible causes. First, global economic growth is slowing, Second, sophisticated refineries in China, India and Turkey appear to have upped output. They have happily bought discounted Russian crude oil. Urals grade crude trades at a discount of $20-$30 a barrel below the Brent benchmark. India has increased its output this year, notes Rystad Energy. Third, the EU built up buffer stocks of diesel supply before the import ban began.
For all these reasons, share prices of European refiners have gone nowhere this year. They will remain in low gear unless economies pick up. More positively, affordable diesel shows the EU is weaning itself off Russian energy supplies less painfully than predicted.
