Energy Crisis Will Continue As Sanctions Will Take Placed on Petro

Sanctions on Russian Oil

Sanctions on Russian petro as set to start on February 05, 2022

As early as Feb. 5, the European Union, the G-7, and its allies will attempt to impose a cap on the price of Russia’s fuel exports — the latest punishment for its invasion of Ukraine. That will coincide with an EU prohibition on almost all imports of Russian oil products.

Similar measures are already in place on the country’s crude shipments, but the cap and ban on refined fuels — particularly diesel —has some oil-market watchers concerned about the potential for price spikes.

Before it invaded Ukraine, Russia was Europe’s most significant external fuel supplier, and the continent has continued to buy in substantial volumes up to the cutoff. As a result, the sanctions are likely to see a great rerouting of global diesel flows — aided by Russia’s new crude buyers sending fuel back to Europe. In the short term, higher prices are risky, as reported by The Economist Digital Subscription.

Diesel Imports From Russia

“The loss of Russian barrels is huge, and replacing them will be a huge logistical challenge,” said Keshav Lohiya, founder of consultant Analytics. “But the market is pricing less panic as markets and trade flows have proven resilient. This will be a new rerouting of diesel.”

The European Union will have to replace about 600,000 barrels daily of diesel imports, and Russia will need to find new buyers for those supplies, store the fuel on ships, or cut production at its refineries.

READ: Where Will Europe Get Its Diesel in Three Weeks’ Time?

Shipments into the EU from the US and India have already been on the rise as they produce more than they consume, allowing them to export their surfeit. China is also expected to send more fuel into its nearby markets, indirectly pushing cargoes from other suppliers toward Europe.

“Product flows from net-long regions will intensify as the continent’s embargo on Russian products takes effect February 5th, which we see compounding a tight diesel situation,” Bernstein analysts, including Oswald Clint, wrote in a note to clients.

India’s role in supplying Europe is notable because it has become one of the biggest buyers of discounted Russian crude since the war broke out.

A significant increase in Indian diesel flows would guarantee that Russian crude was being purchased and refined into diesel in India before being sold back to Europe, as reported by WSJ Print Edition.

EU’s Sanctions Won’t Fully Stop Russian Oil Coming to Europe

Such a trade wouldn’t breach the EU’s rules, but it highlights the inefficiency inherent in the sanctions. Essentially, hydrocarbons will be transported thousands of miles further than would typically be the case — and then back again.

There’s also the potential for murkier practices, such as documenting cargoes or sending fuel to refined products storage hubs in other regions to blend with non-Russian products. 

So far this winter, the worst predictions of oil scarcity have been averted. Diesel, which was the epicenter of oil-market strength months ago, has softened thanks to unseasonably warm weather and an influx into Europe. 

Price on Oil Post Russia’s Sanctions

Crude prices slid after sanctions on Russia appeared to reroute exports rather than cut them. 

Among Moscow’s new — or bigger — buyers will be traders in Africa, Latin America, and possibly Asia. Europe, meanwhile, will likely turn to the Middle East, where giant new refineries are ramping up operations. 

Still, consultant Energy Aspects Ltd. said this week that Russia will only be able to find a home for about a third of its diesel exports and that the rest will have to be shut in.

“The products embargo is the tricky one because Russia has struggled to place its diesel anywhere else other than Europe,” Amrita Sen, the consultant’s chief oil analyst, said at the Global UAE Energy Forum organized online by Dubai-based Gulf Intelligence.

Refining Troubles

That’s in the context of a European refining industry that’s getting ready for a seasonal round of maintenance work and facing disruption.

A threat of renewed strikes in France could shut down some of the nation’s fuelmakers a day after the sanctions on Russia come into effect.  

Two oil refineries in eastern Germany — previously supplied with piped Russian crude — have to make less fuel than they usually would because those flows have halted.

And lying quietly behind all of that is a host of logistical and technical issues that could flare up at any moment.

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Markets for war insurance for ships calling at Russia remain in crisis after key reinsurers withdrew some of their covers. At the same time, oil tanker costs have spiked once in the run-up to the implementation of crude sanctions.

For now, there’s little immediate sign of panic in oil markets. The critical question in the coming weeks is whether enough heavy lifting can transform the world’s diesel flows. 

“The market will always solve it,” said Eugene Lindell, head of refined products at consultant FGE. “It’s just how much pain is it going to incur?”

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