Global Diesel Prices Surge as U.S. Enforces Sanctions on Russia

Global diesel prices and refining margins have soared following the recent sanctions imposed by the United States on Russia's oil sector. These sanctions are seen as a way to further restrict supplies, leading to increased prices, as noted by analysts and data from LSEG.

On January 10, the United States ratified its strictest sanctions yet against Russian oil producers and tanker operations, intending to diminish the financial revenue of Russia, which is the world’s second-largest oil exporter, as it continues its military actions in Ukraine.

Among those impacted by the sanctions are many vessels that belong to a so-called shadow fleet. This fleet has been used to move oil from Russia to countries like India and China, where refining companies have benefitted from Russian imports at lower prices, especially after the European Union banned these imports following Russia's invasion.

According to Natalia Losada, an analyst at Energy Aspects, "Diesel profit margins are up following news on the sanctions, and we anticipate significant disruptions to Russian diesel exports." She indicated that approximately 150,000 barrels per day of diesel exports from Gazprom Neft and Surgutneftegas refineries could now be at risk.

The first month European diesel benchmark contract saw its premium against the six-month contract jump to $50.25 a metric ton this past Thursday, marking a peak not seen in ten months, as reported by LSEG data.

Before the sanctions, the diesel market was already trading in backwardation, a situation where nearby contracts are priced higher than those for later delivery. This generally indicates a tight immediate supply, which has become more pronounced with the latest sanctions.

As of Thursday, diesel refining margins hit a high of $20 per barrel, a level that hasn't been reached in five and a half months. Cold weather in the northern hemisphere has also added support to diesel markets.

Asian diesel refining margins rose by 8% on the preceding Monday, climbing above $17 a barrel. This was the largest increase since September, though they later receded to around $16.50 a barrel by Thursday.

U.S. diesel futures experienced a significant rise of over 5% on January 10, marking their largest daily gain since October, and reached a six-month high of $111 per barrel on Thursday. The front-month diesel now commands over a $10 premium over the sixth-month contract, the highest margin in almost a year.

Traders and refiners are adjusting their operations to account for anticipated higher crude oil costs, but sources based in Singapore noted that the decline in Russian diesel exports may not heavily affect Asian markets immediately.

Despite the increase in diesel margins, the complex refining margins in Asia have seen weakness due to crude oil prices increasing at a rate faster than that of refined products. For instance, Dubai cash prices increased by 8.5% over the past week, while Singapore gasoil swaps only rose by 5.5% during the same period.

Currently, Singapore's complex refining margins, which are an important indicator in Asia, hover near five-month lows at 17 cents per barrel, according to pricing data from LSEG.

Before the implementation of Western sanctions in 2022, Europe was the leading consumer of Russian diesel fuel. Since then, European countries have turned to alternative sources from India, the Middle East, and the United States to mitigate the shortfall caused by the sanctions.

diesel, prices, sanctions