The European diesel market surged during afternoon trading on July 18 following the EU’s announcement of its 18th sanctions package, which bans imports of refined products made from Russian crude.

In a major departure from its previous sanctions policy, the EU vowed to prevent Russia’s crude oil from reaching its member states “through the back door” by targeting imports from other countries.

Exemptions were provided for Canada, Norway, Switzerland, the US and the UK, but not major Russian oil consumers like India and China.

News of the major sanctions clampdown spurred major rallies across the distillates complex as traders warned of potential supply shocks linked to the move.

By 1200 GMT, the front-month August ICE LSGO futures contract was up $42.50 from the previous pricing session at $755/mt, while the prompt August/September spread, a key gauge of market tightness, widened $9.75 to $27.25/mt.

Further down the forward curve, the September/October spread climbed $7 to $16.25/mt and October/November to $21.50/mt, compounding fears of low supplies heading into the winter heating season.

India, Turkey in focus
The new measures put the spotlight on India and Turkey, which became key trade partners for Europe to fill a supply vacuum left by Russia after 2022. Responding to the war in Ukraine, the bloc first sanctioned direct seaborne imports of its crude in December 2022 and refined products in February 2023.

According to estimates from S&P Global Commodity Insights analysts, the ban will potentially impact 250,000 b/d of diesel coming from Turkey and India, which rely heavily on Russian crude oil.

“Europe is a huge sink for diesel and India is a critical supplier, in addition to the US and Middle East, especially after losing Russian volumes due to the February 2023 embargo,” said Rebeka Foley, an oil analyst at Commodity Insights.

According to S&P Global Commodities at Sea data, Europe imported 124,000 b/d of gasoil/diesel from India and 94,000 b/d from Turkey in June, representing 7% and 5% of its total, respectively. Indian imports are down substantially from a peak full-year average in 2023, when they hovered around 200,000 b/d.

The US and Saudi Arabia were Europe’s largest suppliers in June, delivering 380,000 b/d and 190,000 b/d, respectively, CAS data showed.

An additional draw on US and Middle Eastern supplies could have repercussions for Africa and Latin America if supplies are redirected.

Low stocks
New sanctions arrive on the back of existing concerns over low diesel inventories in northwest Europe and the US that have kept markets tight.

In the Amsterdam-Rotterdam-Antwerp hub, stocks plunged to a fresh 18-month low on July 17. However, in an increasingly steep market structure where prompt supply has fetched high prices, stockpiling has remained uneconomical.

“I don’t see that anybody is willing to take stocks or build stocks in this environment,” said a European diesel trader. “With this heavily backwardated market, people are living hand to mouth.”

“If everybody is running on low stocks, then maybe problems will start on the refinery side that will lead to another spike in the market because everybody will be running for product which is not there,” the trader said.

A second source said, “Euro diesel is already just getting by on low stocks,” echoing concerns over where the market will find replacement barrels.

Another European diesel trader said, “I don’t know how Europe has made this decision,” flagging potential ripple effects for the Eurozone economy. “Eventually, it will impact European inflation only,” the trader said.

International response
The tougher measures come shortly after renewed threats from US President Donald Trump to impose 100% secondary sanctions on Russia’s trade partners if it fails to reach a peace deal with Ukraine by September — a move that could prove even more disruptive to countries like India and China.

Responding to the threat of US sanctions, India’s oil minister told an energy seminar in New Delhi July 17 that the country remains well-placed to pivot to alternative crude slates, noting ample availability from the Western Hemisphere.

“If Russian oil dries up, there will be some uncertainty, but there are options available today,” he told delegates at the conference.

However, the country’s refining sector will be challenged by the EU’s specific designation of a Rosneft-owned refinery in India, one of the country’s largest.

According to CAS data, Nayara Energy’s 400,000-b/d Vadinar refinery was recently exporting 7,500 b/d of refined product to Europe, representing more than a quarter of its total shipments.

The Turkish Energy Ministry said it was awaiting further details of the ban.
Source: Platts