Sanctions On Russia About To Expand -- January 25, 2023

From Bloomberg today:

The European Union is about to ban imports of refined oil products from Russia. That could be much more disruptive than its earlier halt to crude purchases.

Starting February 5, 2023, imports of diesel, gasoline and other products used for further processing — including fuel oil and vacuum gasoil — cannot be imported from Russia into EU countries. The US and UK already have their own bans in place.

The sanctions will be accompanied by a ban on using European ships, insurance and other services to carry Russian oil products anywhere in the world unless they’re purchased at a price below yet to be determined caps. This mirrors the restrictions on crude shipments that were imposed December 5, 2022.

Overall crude flows from Russia haven’t been hurt by the EU ban, with seaborne shipments remaining around 3 million barrels a day for now. That will please the US Treasury, whose price cap was aimed at keeping oil flowing. Cargoes that previously went to Europe have been diverted to India and China, with shipments from Russia’s western ports sold at prices well below the $60-a-barrel cap.

But things could be very different for refined products trade.

Asia is thirsty for crude. India and China both import huge volumes for their massive refining systems. The two nations took about 14.5 million barrels a day in 2021, and that figure almost certainly increased last year. By contrast, they brought in just 3 million barrels a day of refined products from overseas.

But those huge systems mean that a ready market for Russian refined products outside Europe simply doesn’t exist in the way it did for crude. Many of the newly built plants were designed to maximize the production of diesel, the very fuel for which Russia needs new buyers.

Huge discounts will be needed to make it economic to move Russian-refined products to Asia while, ridiculous as it sounds, shipping similar products from Asian refineries back to Europe.

Without them, Russia may be forced to reduce processing rates and either boost crude sales or cut production levels — something it has managed to avoid so far.

--Julian Lee, Bloomberg Oil Strategist