Russia warns over 'futile' hopes of a quick end to fuel export ban

Russia cautioned Sept. 28 that its snap ban on most diesel and gasoline exports could last longer than many are expecting, while regional diesel values moved sideways despite concerns of a further tightening of middle distillate supplies.

Russia, the world's second-biggest diesel exporter after the US, announced Sept. 21 a temporary ban on fuel exports in bid to plug a hole in domestic supplies and curb spiriling pump prices. The move is set to remove almost 1 million b/d of seaborne diesel from world markets and smaller gasoline flows of around 150,000 b/d, according to tanker tracking data.

ICE gasoil futures initially surged 4.5% on the day to an eight-month high while the November gasoil crack spread rallied above $37/b. But the gains were short-lived, as market watchers speculated that Russian would struggle to maintain the ban for more than a few weeks due to a lack of domestic storage for products or crude oil. Platts, part of S&P Global Commodity Insights, assessed ICE low sulfur gasoil in London at $972.25/mt on Sept. 27, up 1.9% on the day but little changed from the pre-ban level of $962.75/mt on Sept. 20.

"I will say one thing: expectations of a quick lifting of the ban on fuel exports are futile," Russian Energy Minister Nikolai Shulginov was quoted as saying by Russia's TASS news agency. "The measure will be valid as long as necessary to stabilize fuel supply and prices."

Russian diesel exports had already been falling in recent weeks due in part to higher domestic refinery turnarounds. Russian diesel exports have averaged 673,000 b/d so far in September, down 265,000 month on month and from a recent peak of almost 1.2 million b/d in March, according to S&P Global Commodities at Sea data. Russian diesel exports typically fall in October, however, due to the harvest season.

The export ban is expected to extend these falls significantly, hitting hard Russia's new customers, who have been snapping up its discounted fuels.

Following EU sanctions on Russian oil, Turkey and Brazil have become the biggest single buyers of Russian diesel. Combined, they absorbed 55% of Russian diesel exports in August, CAS data shows. Russian diesel displaced from Europe has also found homes in Africa and the Middle East since the war in Ukraine.

Some of that flow has also allowed Turkey and Saudi Arabia to boost their own exports to diesel-hungry European buyers. Indeed, with Russian export flows already slowing, Saudi diesel exports to Europe have been falling, in a move that will tighten European balances further.

Storage limitations

Russia's lack of any guidance on how long the export ban will last has left market watchers guessing at the scale of the supply shortfalls, but most still expect the ban to run for no more than a few weeks.

Limited Russian oil storage capacity would likely force cuts in refinery runs, a move that could support fuel prices rather than reduce them, they reason. A prolonged export ban also risks creating tensions between Russia and OPEC+ if Moscow is tempted to export more crude in spite of its recent pledges to cut exports.

"We expect the ban to only last a few weeks due to limited storage capacity," oil analysts at S&P Global said in a note. "If it were to persist, it would likely lead to lower domestic runs which would exacerbate domestic gasoline coverage."

In the meanwhile, the temporary loss of Russia's diesel exports is expected to support already high diesel cracks. Global diesel cracks have been high for months compared with historical levels, and the ban should keep prices robust.

Diesel cracks in the Amsterdam-Rotterdam-Antwerp region jumped $7/b to $41/b on the day the ban was launched but have continued to soften since, settling at $34/b on Sept. 26.

"The correction could suggest the market is shrugging off the disruption and expects a short-lived ban due to Russia's limited storage capacity -- it is too early to tell," S&P Global analysts said.

Nevertheless, the ban coincides with low stocks, turnarounds and seasonal heating demand, all of which are "pointing to prolonged tightness and robust cracks through the rest of September and October," S&P Global analysts said, adding that they expect ARA diesel cracks to stay in the $35-$45/b range in the coming months.