Listen: EU sanctions on Russian refined products will reverberate across the Atlantic

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Anna Trier

Hello, and welcome to the Platts Oil Markets podcast by S&P Global Commodity Insights, where today, we will be talking about US gasoline and diesel markets and the upcoming EU ban on Russian refined products. I'm Anna Trier, price reporter for US gasoline markets. And today, I'm joined by Jeff Mower, Director of America Oil News; and Maria Jimenez Moya, price reporter for Latin American Markets to discuss what impact we could see in the US and Latin American markets from these new sanctions.

If you've been following these markets lately, the Russian-Ukraine war has really dominated oil and has been what's gotten our attention for the past year. And this topic that we're going to be discussing today is really just the latest in this kind of big question mark that seems to be hanging over the market.

So Jeff, we are quickly approaching February 5, which is the date that EU sanctions are set to go into effect on Russian refined products. And just a few months ago, on December 5, EU sanctions are on Russian seaborne crude and the additional price cap went into effect. So what sort of impact did we see in the Korean markets from this initial sanctions on December 5?

Jeff Mower

Sure. Yes. So it's interesting when Russia first invaded Ukraine, and we saw talk of self-sanctioning of Russian barrels, and the analysts would come out and first started projecting we would see a loss of a million barrels or more of Russian crude export production. But we really haven't seen that.

On the whole, we've seen a reshuffling of some Russian crude exports, but Russia has been able to find a home for its barrels because of these steep price discounts for its crude. In fact, Russian seaborne crude exports are at like a 6-month high in January so far. Crude loadings from Russian ports averaged around 3.18 million barrels a day in the first 17 days of January. That's according to S&P Global Commodities that see ship tracking software.

And that was up around 20% from December. Keep in mind, that is the goal of the price cap, right? It's like we have this price cap, like you said, that went into effect in December that puts the price of Russian crude of around $60 a barrel, but it's roughly in line with where Russian crude was being traded anyway at a pretty steep discount to date at Brent.

Ukraine and some other countries like Poland and Estonia, they're pushing for a lower price cap. But really, all of the 27 EU members would have to agree to that price cap. And the US and others really want to ensure that Russian barrels keep flowing, Russian crude barrels keep flowing. The Biden administration, right, especially doesn't want to see high gasoline prices again.

The Biden administration last year already released a record 180 million barrels of SPR crude to battle those high prices and kind of running on ammunition in that sense, running out of tools to battle those prices or if they were to see a big surge again and they're getting some pushback, some political pushback, on the SPR crude release.

Anna Trier

Yes. So it does not seem that the sanctions have really necessarily had their intended effect. I think a question I have, and I'm sure listeners do as well is, what was the point of the sanctions in December if they're setting the price cap above where Russian crude was already trading?

Jeff Mower

Well, I think it's mainly just to make sure that Russia is not making as much money on their crude exports than they would without the price cap. And again, make sure that we keep the barrels flowing. They don't want to keep Russian crude off the market, at least the US doesn't. That's the impression. And I think that the price cap was just a way to keep credit on the market because you want to try and keep prices low, relatively low. But you just don't want Russia to make so much money to fund its war effort.

Anna Trier

So Russian crude is still finding a home. So what is the concern with this new upcoming EU ban and price cap that's going to be on refined products?

Jeff Mower

Yes, that's interesting one. I would argue that diesel, in particular, is much tighter than crude. And that's evident in the crack spreads. If you look at the difference between diesel prices and crude prices, that's the crack spread, right, diesel priced in dollars per barrel.

And now today, it's interesting I saw the ULSD crack on the NYMEX has actually dropped a bit because we saw an increase in Atlantic Coast inventories and diesel inventories. And the Atlantic coast is important because New York is a delivery point for NYMEX ULSD futures. But even with that decrease, you still have that crack spread at like $57 over NYMEX crude.

And that's about double our RBOB gasoline crack spread, which itself is kind of high for this time of the year. RBOB crack at $30 a barrel is pretty high for this time of the year. So we still have -- even though we had an increase in diesel inventory, as we see in diesel inventories climb in the US, and also in Europe, the Atlantic Basin is really tight.

We lost a lot of refining capacity during COVID and the impacts of the IMO 2020 regulations, and these were calling for low sulfur bunker fuels to start in 2020, they're now being felt in the market because when COVID came along, demand dropped so much that the IMO 2020 was pretty much forgotten. But now we're seeing kind of pull from diesel because of those requirements.

And then we've just had more refinery outages lately. So even though we have tighter capacity, we had refinery outages earlier this year in Texas and in the Midwest because of our cold snap. And that removed several million barrels of refined products from the market. And you can't really make that up. Let's just go on, right? And now you've got refinery unions in France.

They're threatening to strike over pension reforms, and they say they may start a 72-hour strike starting February 6, 1 day after this February 5 deadline. They said it's supposed to be 72 hours, but it could be indefinite. So that could tighten supplies even further, so there's a real risk there. And I think that really helps explain why the diesel crack is still so strong.

We had pretty warm winter weather in Europe and in the Atlantic Coast, which has really helped keep demand a little lower for fuel, especially like fuel switching for heating purposes. But again, while diesel stocks have climbed in Europe, they're still tight. They're still below the 5-year average.

Anna Trier

And they only have a few days really until these new sanctions go into effect. So what has Europe been doing to get prepared in advance of that date?

Jeff Mower

They've been buying more diesel from Russia and storing it. From what we've seen, Europe, even though it's still early, well, most of the way through January here, but Europe continues to source more than 1/4 of its diesel imports from Russia according to the tanker tracking software.

We saw a surge in imports from Russia in December and January is looking pretty strong with around 30% of imports coming from Russia. And that makes sense. I think we saw that before. It was interesting. We saw that last year as well. We saw a big surge right after the invasion, we saw this surge in flows like diesel flows as some countries were just prepared for the worse.

Like let's just buy it up now and store it. And I think that's what Europe is doing now, which really does make sense, especially again, considering how low their inventories are. But it's a lot of barrels. You're talking about something like 700,000 barrels a day that Western Europe buys from Russia. How do you replace all that, right?

So we are seeing increases, even though Europe is still buying a lot of diesel from Russia. We're seeing an increase in diesel imports from Saudi Arabia and the United States, the UAE and a couple of other countries there. But it's sort of in bits and pieces.

Anna Trier

Yes. And that certainly tracks anecdotally with what I've been hearing in the gasoline market. People have been kind of keeping their eye on what's going on in the diesel market in Europe as well. And they've just seen a large uptick in cargoes being imported into Europe, especially in January. And interestingly, kind of shifting back to the gasoline side, is something you've heard is there seems to be a lot of interest to load cargoes out of Europe to the US for gasoline.

So my question around that is like what kind of impact do you think we're going to see on the US side and especially on the gasoline side from these sanctions? I wouldn't necessarily maybe expect that we would be seeing more imports, but it seems like the arbitrage is open and that there seems to be a lot of willingness to move those cargoes transatlantic.

Jeff Mower

Yes, that's a good question. I'm not sure about the gasoline front. We do regularly get some gasoline blend stocks into the US from Europe. I would imagine if European refineries are running all out, then they're going to be maybe to have an excess of gasoline that they need to unload there.

On the diesel front, I think what you might see is an increased flow of diesel, kind of like we're already seeing increased flow of diesel from the US to Europe, but I'm really curious to see where the sort of band, the Russian diesel barrels end up going. Like if the price discounts are deep enough, could we see those barrels go to Latin America, which is like the #1 destination for US to export on diesel.

We've seen some exports of Russian diesel to Brazil picking up in January, but it's not a lot. We're talking like I think I saw something, 680,000 barrels total for the month. That's pretty small. You're talking about something like 37 million barrels a month of diesel that gets imported into Latin America.

Anna Trier

That's a really interesting question, right, because you imagine like is what's going to happen is these barrels, these are fine product barrels from Russia, just end up getting routed somewhere else. And then does this just increase voyage times? And is this going to impact the freight market as well. So definitely a lot of questions there.

But you brought up Latin America. So I want to bring in price reporter Maria on this. But before we hand it off to Maria, I want to take a moment now and let our listeners know that we're kicking off London International Energy Week with the Platts London Energy Forum on February 27. Now this has happened at a really interesting time with the world trying to meet both energy needs and net 0 targets. And we want you to join us for these conversations in the coming year. We have expert speakers lined up to talk about our benchmarks, decarbonization, energy security and a lot more. And we'll also have commodity-specific breakout sessions. You don't want to miss this, so sign up for the Platts London Energy Forum on our website or with the link in the show notes.

So Maria, Jeff kind of tied in how we might see this impact in the Latin American markets, which is your area of expertise. So I kind of want to set the stage for our listeners. In a normal market, what kind of impacts do Russian barrels have on Latin America?

Maria Jimenez Moya

So in the normal market, there is not a lot of Russian presence in Latin America, and this is purely because of distance. It is just not cost effective to travel such a long distance from Europe, all the way down to Latin America, which is why we see mainly Latin America importing from the US or producing their oil versus reaching all the way to Europe. So even though there has been like a few barrels coming in here and there prior to the sanctions, there wasn't really a big presence or interest of either Russia going to Latin America or Latin America seeking Russia for product.

Anna Trier

Do we think that this is something that's going to change after we see these refining product sanctions being implemented against Russian?

Maria Jimenez Moya

Yes, definitely. I think we're going to be seeing more and more Russian barrels in Latin America as we have seen in the past year. Like Jeff mentioned, Brazil has been buying barrels, but we also have other countries. Ecuador buys barrels as well, so does Cuba. The Caribbean has been buying barrels as well. And it's all due to the political ties that the countries have with Russia.

Now that the sanctions are going to take place, we're going to see that US and Europe face a really, really tight market without the supply of Russia, which indirectly is going to affect the Latin American market as well. So it will become like I wouldn't say necessarily a race, but if the Russian product drops to a low enough price, inception is there and Latin America is going to be very tempted to buy it.

It will just become a question of who's going to pounce at first. And I think that once one country starts buying more product, other countries will trickle. And the situation that we've been seeing is that countries in Latin America have been a little bit skittish. [ Aruba isn't ] buying Russian barrels because they're scared of the potential backlash that other countries might give them, especially the US being a powerful neighbor of Latin America.

Countries such as Colombia have refused to take in Russian product. Mexico has really been known to take inversion product either. But as this year has progressed, we've seen smaller countries in Latin America taking Russian product little by little. It is just a matter of how discounted the barrel is and if it makes sense economically for them to take it.

Anna Trier

So I imagine if we start seeing Russian barrels make their way to Latin America or at least in greater volumes than we've seen in the past, this is probably going to change like the trade flows in the region, right? Do you think anything is going to change between trade flows between Mexico and the US?

Maria Jimenez Moya

Definitely. I think that the real risk that Latin America is having right now, and it's something that I've heard across the market, is this fear of what's going to happen once the Russian sanctions take place and what is the US going to pick to do. So as we know, the US supplies a lot of barrels to Latin America.

Once the sanctions take place, I think the US is going to be in quite a struggle of do we need to supply barrels to Europe or do we need to keep supplying barrels to Latin America. So it will be both a political strategy, but also an economical strategy of who's willing to pay more for the barrels, but also that you are showing allegiance to different countries.

So this is a fear that Latin America has because if they lose the influx of barrels from the US, they're going to have to turn to a different market to get that supply. And that places Russia in an advantage because they will be in a position to supply Latin America those barrels that the US would or might prefer to supply Europe instead of Latin America.

Anna Trier

Very interesting. Like such an interesting time in the market, and it just keeps on coming. I think it's clear that there are so many unanswered questions about these sanctions and particular the impact that they're going to have on commodity markets. So thank you so much, Jeff and Maria, for your time and for joining me in this conversation today. And thank you to our listeners for tuning in. This is the Oil Markets podcast that was produced by Jennifer Pedrick in Houston.