EU cap to limit Moscow’s choice of buyers

A proposed EU price cap on Russian diesel may be high enough to allow Moscow to continue exporting the fuel, but in practice could deter big Asian buyers who have become used to buying cheap Russian crude to refine it themselves, analysts say.

The European Commission is proposing that the EU set a $100/bbl price cap on Russian diesel and a $45/bbl per barrel cap on discounted products like fuel oil, EU officials said.

The February 5 price caps and EU ban on Russian oil product imports are part of several measures the West is using to slash Russia's export revenues, limiting Moscow's ability to fund its war in Ukraine which it waged nearly a year ago.

Analysts say these measures are already working and the price cap is expected to exacerbate Russia's budget deficit.

"Russia may struggle to offload its diesel to other buyers with key customers in Asia being more interested in feeding their refineries with heavily discounted Russian crude, which can then be turned into fuel products selling at the prevailing global market price," Saxo Bank analyst Ole Hansen said.

Other analysts say that the proposed price cap is near enough to current spot oil product prices to allow Moscow, in theory, to continue exporting to some regions.

"Embedded in our analysis is the assumption that products price cap is set at levels high enough to allow Russian exports to keep flowing," analysts at JP Morgan said. The bank attributes a recent rally in oil prices to volatility in the oil products markets.

The benchmark Intercontinental Exchange European diesel futures contract closed at $965.25 a tonne on Thursday, or about $130/bbl.

A European trader said that the proposed diesel price cap is roughly in line with the $60/bbl price cap the G7 imposed on Russian crude exports, once you factor in the value of diesel relative to crude.

According to Reuters assessments, the theoretical profit margin that a refiner stands to make from refining a barrel of crude into diesel stands at just over $40 a barrel.

Europe has already gone a long way in diversifying its diesel imports, bringing in record volumes in recent months particularly from the Middle East and Asia Pacific. But Russian imports have also surged in recent months ahead of the February 5 price cap and import ban.

Consultancy Energy Aspects revised upwards its forecasts for European diesel stocks for the end of January, but said that the EU embargo is expected to create logistical difficulties as some storage operators struggle to segregate Russian-origin products.

"[Our] soundings indicate some importers are already experiencing difficulties in selling Russian diesel from storage, facing added requirements to segregate Russian from non-Russian diesel in storage tanks to avoid contamination, and seeing delays to clearing customs in some EU markets," they said.

New refining capacity coming on stream later in the year is expected to help balance the market.

"We expect volatility in distillate cracks and prices in 1Q23 around the embargo implementation but see market imbalances clearing by 2Q23 and risk premium in distillates dissipating," JP Morgan said.