Oil product market: changes are coming

Energodigest | 24 January 2023
The price cap on Russian oil introduced by the G7 economies, the European Union and Australia came into effect on 5 December 2022, simultaneously with the EU embargo of seaborne imports of Russian crude. Since then, Urals has been trading at an average of $55 per barrel, with its discount to the North Sea benchmark being slightly less than 35% (see Fig. 1). This means that the actual price of Russian crude is now below the current cap of $60 per barrel, which is due to be reviewed in March.[1]
While experts reflect on the effects of the existing restrictions on Russian crude, another EU embargo, accompanied by a price cap, is expected to come into force very soon, on 5 February, this time on oil products. Though the details are yet to be worked out, EU officials have already warned that the products embargo and price cap will be more difficult to administer than the crude embargo and price cap. According to some media reports, the coalition plans to set two caps, one on products that trade at a premium to crude, such as diesel, and one on products that trade at a discount to crude, such as fuel oil.[2]

While crude oil flows from Russia have been largely diverted eastwards to Asia, this region will not be as good a destination for Russian oil products, as demand there is likely to be low because of well-developed local refining facilities. Nevertheless, Russia is ramping up supplies to alternative markets, such as Turkey, with diesel supplies there growing from 3.99 million tonnes in 2021 to 5.05 million tonnes in 2022,[3] and Singapore, which took in more than double the previous year’s volume of Russian naphtha and fuel oil in December 2022 with a view to re-exporting them to other parts of the globe[4] (see Fig. 2). Note that refining margins in both Europe and Asia are high (see Fig. 3).
And they would be even higher with Urals used as a feedstock. As shown in Fig. 4, in the first three weeks of January, crack spreads between FOB diesel fuel prices and the price of Urals widened 350% in the Mediterranean region (vs. 180% for Brent) and 340% in Singapore (vs. 120% for Dubai) compared with the same period a year ago.
With ample refining capacity in Asia, oil product prices there have historically been lower than in Europe (by an average of 4% since the beginning of 2021). Should the G7 decide to use the five-year average price as a benchmark, Russia’s light oil products may be capped at $610 per tonne, which is nearly 30% below the market price of diesel in Singapore this month. And the price gap between diesel and Urals (i.e., the gross margin for diesel earned by Russian refiners) may therefore narrow to around $200 per tonne, compared with this month’s market average of $430. If the price cap on oil products is tied to Urals, which is now capped at $60 per barrel, and to the five-year average crack spread, light oil products could be selling at $590 per tonne.

And one may only guess how this will affect market prices globally, including in Europe. Diesel fuel is the main concern, as until recently it has been imported mostly from Russia (see Fig. 5).[5] Considering that the global market is highly dependent on supplies from Russia, regional hubs are set to play an increasingly important role, with Singapore and other countries hosting large oil product terminals to reap the most benefit out of this reshuffle.
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