The European Union’s latest round of sanctions against Russia, adopted last Friday, are set to create significant ripples in the global diesel market, according to Commerzbank AG.
With a lowered oil price cap, an expanded “shadow fleet” blacklist, and an impending import ban on Russian-refined oil products, the EU is intensifying its efforts to curb Moscow’s energy revenues.
Volatility concerns
However, these measures arrive at a time of peak demand and historically low distillate stocks, prompting concerns about further price volatility.
The 18th package of sanctions has slashed the oil price cap from $60 to $47.6, while introducing a semi-annual review mechanism to maintain the cap at 15% below market price.
The number of Russian “shadow fleet” tankers subject to sanctions has also surged to 444.
A new import ban on oil products refined from Russian oil is slated for mid-January next year, a direct response to Russia’s resilient oil exports despite previous sanctions.
“Russia’s oil exports have hardly declined since the start of the war in Ukraine, despite increasingly stringent sanctions,” Barbara Lambrecht, commodity analyst at Commerzbank AG, said in a report.
Ultimately, new buyers have been found (China, India, and Turkey).
Source: Commerzbank Research
A key concern for the EU is the suspected re-export of Russian oil in refined form.
While the EU has embargoed Russian oil products since February 2023, tanker data analysed by Bloomberg suggests that around 15% of EU diesel imports originate from India and Turkey.
There’s a strong suspicion this diesel is produced from comparatively cheap Russian oil. In a significant move, an Indian oil refinery, almost half-owned by Russia’s largest oil producer, has now been added to the EU’s sanctions list.
This “laundromat” effect, where Russian crude is refined elsewhere and then re-exported to Europe, highlights the complexities of enforcing energy sanctions.
The upcoming import ban on such products aims to close this loophole, but its implementation will likely face significant challenges.
Strained Diesel Market and Soaring Prices
The impending import ban ushers in a new challenge for the diesel market, coinciding with its peak demand season.
The market has already experienced considerable strain in recent weeks, with the gasoil crack spread—a key indicator of refining profitability—rising by $9 to $26 per barrel since mid-June, according to Commerzbank.
Such sharp price movements are unusual for the diesel market during the summer months, which is typically more influenced by crude oil prices.
The primary driver behind this volatility is the significant drop in distillate stocks in industrialized countries, Lambrecht said.
Commercial OECD stocks have fallen well below the five-year average in the first few months of the year, with inventories particularly low in European OECD countries.
This trend continues, as gasoil stocks in the Amsterdam, Rotterdam, and Antwerp region are now 15% below their long-term average, a stark contrast to the first quarter when they were still well above this level.
Lambrecht said:
Given the very low inventories, the crack spread on the European market is likely to remain higher than we had previously expected, especially since – as in the case of the EU embargo in winter 2023 – prices are likely to remain supported, particularly in the run-up to the import ban coming into force.
Europe’s import reliance and shifting trade routes
The EU, which accounted for approximately 15% of global diesel demand in 2024 with daily consumption of 4.7 million barrels, is heavily dependent on imports.
The US has emerged as a crucial supplier in this context.
After several years of decline, US diesel exports rose sharply last year to around 1.3 million barrels per day.
While Latin America remains the largest customer, significant quantities have also been flowing to Europe since the EU embargo against Russia.
The Netherlands, as an important import hub, received over 100,000 barrels per day last year, while the United Kingdom purchased around 80,000 barrels.
However, the increase in US diesel exports has stalled since the beginning of the year.
Source: Commerzbank Research
US inventories of middle distillates are currently about 20% lower than usual for this time of year, dampening hopes of a sharp increase in exports in the near future.
“Given the very low inventories, the priority in the US is likely to be on building up stocks for next winter,” Lambrecht noted.
China and Saudi Arabia: export uncertainties
Another major player in the global diesel market, China, has also been cautious with exports recently.
Despite weak domestic demand, Chinese diesel exports averaged just over 115,000 barrels per day in the first half of this year, significantly lower than their peak years.
Low margins and limited state export quotas are likely contributing factors. Nevertheless, market reports based on tanker data indicate a significant increase in diesel exports in July, Lambrecht noted.
More attractive crack spreads could also incentivize Saudi Arabia, another major diesel exporter, to increase its supply to the world market.
However, recent attacks by Houthi rebels in Yemen on commercial ships in the Red Sea have rendered the shortest transport route from Asia to Europe unsafe, potentially complicating deliveries.
Outlook: sustained high prices and demand growth
Against this backdrop, a partial reversal of the sharp widening of the crack spread on the diesel market is anticipated, Lambrecht said.
However, due to low inventories, the crack spread on the European market is expected to remain elevated.
A slight economic recovery in the important European sales market is also supporting prices.
The eurozone is likely to benefit from the ECB’s interest rate cuts, and Germany is projected to receive an additional boost from public demand in 2026.
Diesel demand is also expected to pick up slightly outside the OECD.
Overall, the IEA forecasts a more than twofold increase in global diesel demand next year compared to the current year, at a good 110 thousand barrels per day.
“In line with our anticipated decline in crude oil prices, we now expect a diesel price of USD 660 per ton at the end of the year,” concludes Lambrecht, revising their previous forecast of $630.
The confluence of stricter sanctions, low inventories, and growing demand suggests a challenging and potentially expensive period for the global diesel market.
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