The new rules are designed to allow for “leaks” that will soften the blow for both sides, Bloomberg writes.
For decades, a steady stream of tankers has moved back and forth between a small group of ports in northwest Europe and the Baltic Sea. As a rule, each of them carries about 40 million liters of diesel, to fuel Europe’s economy. From tomorrow, this will be banned, along with almost all deliveries of Russian fuel to European Union.
Initially they had caused some alarm, but the new rules are designed in such a way as to allow “leaks” that will soften the blow for both sides, writes Bloomberg. And according to this analysis, the biggest winners will likely be traders and shipping companies, as fuel is expected to continue to flow, simply through more complex, circuitous routes.
“The system will find its balance sooner or later. At a cost to everyone, of course,” he explains to Bloomberg Dario Scaffardi, who until last year was “running” one of Europe’s largest oil refineries as CEO of Italy’s Saras. “I don’t think there will be any major crisis.”
The price of diesel soared in Europe when Russia invaded Ukraine almost a year ago. It has since eased somewhat, and recent moves show that concerns about the fallout from the ban have eased.
The European Union, in agreement with G7 governments, is also introducing a $100-a-barrel price ceiling for Russian diesel.
This means that third countries that want to access services for cargoes from Russia (such as insuring them), will only be able to do so if they pay under the cap.
In practice, rather than hindering exports, the ceiling was set relatively high and thus designed to allow them to continue. The effects of the ban will also be limited by redirecting diesel trade flows through non-EU countries.
There is, of course, a fair amount of uncertainty about how this will all play out. Europe has already been facing an energy crisis for months due to the war that has driven up the cost of fuel.
Already, European countries have taken care to accumulate stocks, with shipments to the E.U. to reach in the last quarter of 2022 the highest levels since at least the beginning of 2016 and to remain at higher than normal levels since the beginning of 2023.
In addition, there are several legal ways to get around the ban. It is likely that Russian crude will be processed in countries such as India and then shipped to Europe as non-Russian diesel.
For now, Russia doesn’t seem to expect much disruption. According to its plan, it will export about 730,000 barrels of diesel per day from key western ports this month. These are the highest flows since at least the beginning of 2020, while its refineries see no reason to reduce their activity, as the energy minister said.
Whether this will play out remains to be seen and will depend on Russia’s ability to open up to new markets. That is, it can convince third countries to buy Russian diesel and then send it to Europe.
This can be an attractive activity for traders located in countries where they can buy cheap Russian cargoes, which they can then sell to the EU. at higher prices.
Russian Baltic Sea diesel was valued at around $90 a barrel earlier this week, about 25% below the cost of diesel for delivery to northwestern Europe.
In Turkey, for example, imports of Russian diesel fuel reached record levels in December, while the country’s total exports also rose to their highest level on record. This trade is legal and is a possible way to mitigate the impact of the ban. Accordingly, Morocco’s imports increased last month.
But in addition to the ban on sea imports, there is also the issue of the price ceiling. Russian fuel can still be legally sold above the cap, just not to companies using Western financial services. For this purpose, a large shadow fleet of tankers has been created, estimated at 600 vessels, according to Trafigura.
However, all this may not be enough to cover all of Russia’s production. Wood Mackenzie estimates the country’s diesel exports will fall by about 200,000 barrels per day this quarter compared to the last quarter of 2022.
Mark Williams, an analyst at Woodmac, expects a rise in diesel prices, although not quite to the levels in 2022, “when the market got spooked”. “There was time to stock up and find alternative supplies,” he explains.
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