The EU challenges Russia. The oil war has begun, diesel may be the victim
Europe is now telling Moscow “I check” and is almost becoming independent of oil from this direction. The breakthrough, however, is taking place quietly – the market has calmly accepted the embargo on Russian gas, which has been in force since Monday. Brent crude oil cost around $86 on Monday. per barrel. That’s about $25. less than in June.
It is hardly surprising – the decision has been known since May, so the market has managed to get used to it. Stability is also supported by the planned transition phase – tankers loaded by December 4 must be unloaded by January 19. Until then, there is no embargo or price limit.
However, the lack of reaction does not mean that nothing has changed. On the contrary, the decision marks a major turnaround. — If we add to the cessation of importing Russian oil by sea the announced departure from importing it via oil pipelines via Germany and Poland, it will turn out that oil from Russia will be sent only the southern thread of Friendship going through Ukraine to Hungary, Slovakia and the Czech Republic. And that means that in Europe would only have about 10 percent left. of Russian oil compared to what it was before the war – says Rafał Zywert, fuel market analyst at Reflex.
The embargo is the beginning. Price limit comes into play
The EU does not intend to stop at the embargo alone. At the end of the week, it was announced that a compromise had been reached on the price cap for Russian oil. Crucially, it goes beyond the continent itself.
“You have to explain that.” limit means the rate ($60 per barrel)to which European oil traders have to adapt. In other words, if, for example, Turkey, Paraguay, Indonesia want to buy Russian oil, but with the transport of European companies, financing or insurance of a European bank, the purchase price cannot be higher than USD 60. – explains Rafał Zywert.
However, this news has not yet electrified the market either. Why? – It is difficult to predict today what the introduced limit will really bring. It should be made clear that it means the rate to which European oil trading companies must adapt. In other words, if, for example, Turkey, Paraguay, Indonesia want to buy Russian oil, but with the transport of European companies, financing or insurance of a European bank, the purchase price cannot be higher than $60. And it does not take into account freight and insurance costs, which have now skyrocketed, the analyst points out.
Calm before the storm?
However, the current peace does not have to last long. Much depends on the extent to which Russia can manage without the support of European entities in practice. And what retaliation will he choose to take? For now, the reaction is enigmatic. Until recently, 60 percent crude oil flowing from the ports of Primorsk and Novorossiysk was transported to EU and G7 companies. Now Russia will probably have to reduce production a bit. The market is waiting for Moscow’s response, the local energy minister has indicated that he will not accept this mechanism and will prepare an appropriate response. OPEC withheld decisions, says Rafał Zywert.
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What could be Moscow’s response? It’s all about cutting Russian production. In the absence of OPEC+ reaction (which has so far also decided to reduce production due to falling prices), it may soon drive up prices on global markets.
— If the largest importers of Russian oil, such as China or India will not be able to deal with importing the raw material without using it from European assets, and Russia would reduce production, they would have to look for supplies from, for example, the Middle East. And that would lead to an inevitable increase in prices, he says.
Diesel under pressure
While it can be expected that customers have already got used to the lack of Russian fuel on the European market, access to ready-made fuels, especially diesel, may be a problem.
The European embargo on its imports from the East comes into effect in February. And the continent, contrary to what is happening in the oil market, is still dependent on diesel from the East. According to Bloomberg, from November 1-24, the EU and the UK received about 600,000 a day. barrels of diesel fuel from Russia, which is 45 percent. all deliveries. In October it was 34 percent.
Analysts point out that this means that fuel will be more expensive. — In the following months, especially after the entry into force of the February embargo on imports of finished fuels from Russia imposed by the European Union we can expect a noticeable price increase. It is quite obvious, considering that the EU for years benefited from the profitability of imports from a relatively cheap source, which was the Russian Federation, while moving away from diesel production at home for ecological reasons – says Jakub Bogusławski, e-petrol.pl expert.
– Approx. 10-12 percent of European diesel consumption came from Russia. In fact, Europe lacks refining capacity to fully meet demand. Consumption will probably drop slightly in the face of the embargo, and new refining capacity will soon be added in the Middle East. So the market should sort itself out, but let’s remember that the Middle East is also an area of frequent political turmoil. Prices may go up but today it is difficult to predict whether diesel oil may run out in Europe – notes Rafał Zywert.
There is already a sharp jump in prices. According to a recent report by the International Energy Agency (IEA), they rose to record levels in October and are now about 70 percent higher than last year, while benchmark Brent crude prices rose by just 11% over the same period. Distillate inventories are at their lowest in many decades.
And last month’s strikes at French refineries and the looming embargo meant that diesel prices in Rotterdam, Europe’s main trading hub, at one point exceeded $80 per barrelthen dropped a bit.
Orlen calms down
As PKN Orlen assures, there will be plenty of diesel oil at Polish stations, and the announced embargo will not be a shock – deliveries from this direction have already been abandoned. “PKN Orlen does not import diesel oil from Russia, balancing the domestic market with purchases from alternative directions. Therefore, the concern is already implementing restrictions that will formally come into force from February 2023. From this perspective, supply problems should not be expected resulting in a lack of fuel at stations and on the wholesale market,” we read in response to our questions.
The company from Płock admits, however, that the situation on the European market is difficult. “Demand for diesel has exceeded the available supply for a year. The source of this state of affairs should be sought already in the COVID-19 pandemic, which affected the operation of refineries around the world. In 2022, the demand of the energy sector increased, which in many areas switched from gas to diesel fuel. The war only deepened this deficit,” the company estimates.
According to Rafał Zywert, although Poland is in a fairly good situation compared to the rest of Europe, we also face a serious test that will test the reliability of new supply directions.
“Today Poland receives much smaller amounts of diesel from Russia, even though the embargo does not come into force until February 5 next year. Last year, Russian diesel accounted for over 20 percent. domestic consumption, now it is below 8 percent. We now import it from Germany, Norway, Great Britain, Sweden, the Netherlands and the United States. Imports from the Middle East will probably increase. For this reason, it seems we are more secure than much of the continent, but the question is how stable our sources of supply will prove to be. After the embargo enters into force on February 5, 2023, they will be tested, the expert points out.
Grzegorz Kowalczyk, journalist at Business Insider Poland
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