Russia's diesel ban threatens to roil global markets if it lasts

Russia's decision to ban exports of diesel — and gasoline — risks disrupting fuel supplies ahead of winter, but how deep the impact will be depends on how long it lasts.

The nation shipped more than one million barrels a day of diesel-type fuel so far this year, narrowly making it the world's biggest seaborne exporter, according to data from Vortexa. That's an enormous chunk of supply for the market to lose at short notice — roughly enough to meet the entire demand of Germany.

The supply loss, and any subsequent price rise, won't just matter to oil traders and truck drivers. Diesel-type fuel is also used in ships and trains, as well as by the farming, manufacturing and construction sectors. In short, it powers vast swaths of the global economy.

"It all comes down to the duration," said Eugene Lindell, head of refined products at consultancy FGE. Russia's refineries "could probably go a month before they'd have to shut down again on storage capacity constraints."

Illustration: TBS

Russia says it instituted the temporary ban to dampen rising fuel prices at home, but absorbing all those barrels domestically may be a challenge. Some can go into storage, and the situation will also be helped by many refineries undergoing maintenance work.

But at some point the country will have to resume exports or slash refinery output. And the latter option risks a domestic gasoline shortage.

"Even though the ban is indefinite, we don't expect it to last long," said Koen Wessels, an oil products analyst with consultancy Energy Aspects.

Market reaction

While the unexpected supply loss pushed key diesel market metrics higher, the moves were relatively subdued for such a major event, suggesting some scepticism among diesel traders about its real-world impact.

In northwest Europe, the premium of benchmark diesel futures to crude oil, known as the ICE Gasoil crack, jumped in response to the ban, temporarily surpassing $37 a barrel and hitting a five-day high, according to fair value data compiled by Bloomberg.

Futures for October delivery also gained relative to fuel for arrival the following month. The bullish structure, known as backwardation, neared $36 per ton, only a three-day high.

Bigger picture

Global diesel supplies were already under severe pressure before Russia's export ban was announced. Refiners' yields have been curbed by a combination of OPEC+ crude oil cutbacks and demand for other refined petroleum. Plant outages haven't helped.

Before the invasion of Ukraine, Russia's seaborne diesel exports barrels were primarily shipped to European nations. But the imposition of sanctions upended global trade flows — shipments to Turkey have jumped. Other recent destinations for cargoes include Brazil, Saudi Arabia and Tunisia.

That doesn't necessarily mean these countries will bear the entire brunt of Russia's supply cut. The diesel market is global: If Turkey, or Brazil, for instance, is unexpectedly short, cargoes from non-Russian suppliers may head there instead of Europe.

What next?

The ban comes into force 21 September, though it's not an immediate, hard cut-off. Under the decree, fuel cargoes already accepted for shipment by Russian Railways or those with loading papers for seaborne transportation can still be exported. That indicates diesel flows will only gradually decline while these cargoes are shipped.

There are exemptions for minor supplies, including deliveries to trade alliance partners from some former Soviet republics, as well as intergovernmental agreements, humanitarian aid and transit, the decree said.

When the ban is eventually lifted, there's also a risk that Russian supply bounces back at breakneck pace, as exporters look to offload the product that's built up in storage.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.