Ukraine war sees diesel prices rise as Russia's thirsty battle tanks guzzle fuel

Russia's invasion of Ukraine is consuming more than its supply of battle tanks. Higher domestic diesel prices show how large volumes of fuel are being guzzled by the Kremlin's military machine.

Official data from the Russian energy ministry shows that domestic diesel output started to rise in December, and consumption started to increase from February, which coincides with the order to invade Ukraine. The campaign may be consuming almost 6% of Russia's total diesel refining output, according to an S&P Global Commodity Insights estimate.

"A possible rough estimate is around 15 million liters/day for all types of fuel combined, including about a quarter on jet fuel," George Voloshin of Aperio Intelligence said in reference to the volume of fuel Russia's military is consuming fighting the war.

Other analysts said that calculating precise estimates is more complicated, however, and actual supplies could be higher.

"Diesel consumption by Russia's military is propping up Russia's diesel/gasoil demand in the second quarter of 2022, which is expected to near second quarter 2019 levels as a result," Rebeka Foley oil market analyst, Europe at S&P Global Commodity Insights said.

Russia's monthly diesel output has typically been between 6.6-6.8 million mt, rarely exceeding 7 million mt, with variations depending on the refinery maintenance season. However, it climbed to 7.382 million mt in December compared with 6.842 million mt in November 2021 and 6.752 million mt in December 2020. The increase continued in January 2022, when diesel output once again rose above the 7 million mt level, at 7.408 million mt, compared with 6.683 million mt in January 2021. Since the conflict began, Russia has largely stopped publishing any production data.

Meanwhile, military demand started to rise from the start of February, even before Russia invaded Ukraine Feb. 24.

According to industry sources, Russia's military demand tripled before the invasion as it had to supply large numbers of tanks and trucks in the field. A standard T-72 main battle tank -- the mainstay of Russia's armored forces in Ukraine -- has the capacity to carry 1,590 liters of fuels.

Domestic prices

Military demand has also contributed to domestic diesel prices remaining strong, unlike prices for gasoline and especially fuel oil, which have recorded steep drops since the start of the conflict. Diesel prices on Russia's St Petersburg International Mercantile Exchange (SPIMEX) basis FCA Ufa were around Rb55,100/mt ($874.6/mt) May 13, compared with Rb50,700/mt in mid-March.

In contrast, regular unleaded gasoline fell to Rb38,300/mt from Rb46,500/mt in mid-March. Typically gasoline prices start rising as driving picks up in the spring but this year the military conflict near typical tourist destinations in southern Russia has dampened consumption.

Typically, the Russian army secures fuel via state procurement at prices that differ from the spot market, according to sources. It also takes predominantly diesel shipped via pipeline, which makes it harder to trace compared with rail deliveries.

According to market sources, diesel for the Russian military has been delivered via the products pipeline system to pumping stations in Bryansk and Belgorod close to the border with Ukraine. Storage sites in both cities have been targeted since the conflict started. More recently, Russia has deployed air defense systems in the area to protect the assets.

Ukraine has also targeted fuel depots in Russian-controlled Donetsk and Luhansk.

"I am aware of several instances when fuel depots have been targeted in those territories. This does seem to be an effective strategy by Ukraine to slow down Russia's advance," Serhiy Kuyun, the head of the A-95 energy consultancy, said.

Consumer weakness

Overall Russian domestic diesel demand has been on the rise this year, according to data provided by the energy ministry. Weekly shipments have rarely exceeded 900,000 mt even at the peak of the autumn agricultural works. However since late January, they have consistently been above 900,000 mt (957,857 b/d) every week and reached 1.05 million mt and 1.032 million mt respectively for the last two weeks of March, after which Russia discontinued publishing the data.

Part of the increase has been attributed to the switch by end-users to Euro 5, or 10 ppm diesel, after tax authorities started clamping down on the use of tax-exempt middle distillates as an alternative fuel. Spring agricultural demand, which has been stronger this year as Russia speeded up sowing works, has also provided some of the boost.

Military demand for some other oil products has been outweighed by a sharp drop in civilian consumer consumption. The IEA estimated that jet/kerosene consumption fell by 13% month on month in March, despite the huge increase in military requirements.

The number of Russian commercial flights fell significantly in March, as the country shut several airports in the south, and responded to foreign countries closing their airspace with similar measures.

S&P Global Commodity Insights sees jet fuel demand in Russia declining in every quarter of 2022 compared to 2019 levels due to steep economic contraction, lower disposable incomes, and sanctions.