Global diesel prices spike as US hits Russia with new sanctions

Global diesel prices and refining margins spiked following the latest round of US sanctions on Russia’s oil trade based on expectations that the measures would tighten supplies, according to analysts and LSEG data.

US imposes tough sanctions

The US imposed its toughest sanctions on Russian producers and tankers yet on January 10 to curb the world’s No. 2 oil exporter’s revenue for its war in Ukraine.

Many of the newly targeted vessels, part of a shadow fleet that seeks to circumvent Western restrictions, have been used to ship oil to India and China. Refiners in those countries have benefited from Russian imports that were banned in Europe following the Russia-Ukraine crisis.

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“Diesel [profit margins] are up following news on the sanctions, and we expect meaningful disruptions to Russian diesel exports,” said Energy Aspects analyst Natalia Losada. She added that at least 150,000 barrels per day (bpd) of Russian diesel exports from Gazprom Neft and Surgutneftegas refineries are at risk.

The premium of the first-month European diesel benchmark contract to that six months later LGOc1-LGOc7 spiked to $50.25 a metric tonne on Thursday, a 10-month high, LSEG data shows.

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State of the diesel market

The diesel market was already in backwardation, the term used for a market structure whereby nearby contracts trade at a premium to later delivery contracts. This usually denotes tight prompt supply.

Diesel refining margins LGOc1-LCOc1 stood at a five-and-a-half month high of $20 a barrel on Thursday.

Cold weather in the northern hemisphere was already supporting diesel markets.

Asian diesel refining margins GO10SGCKMc1 jumped 8 per cent on Monday to above $17 a barrel, the largest gain since September, before easing to about $16.50 a barrel on Thursday.

US diesel futures surged more than 5 per cent on January 10, their biggest daily gains since October, and hit a six-month high of $111 per barrel on Thursday.

Front-month diesel is commanding an over $10 premium over the sixth-month contract, the largest premium in almost a year.

Traders and refiners are factoring the higher crude costs into fuel prices and refining runs, two Singapore-based trade sources said, adding that lower Russian diesel flows are unlikely to have a big impact on Asian markets directly.

Even with higher diesel margins, Asia’s complex refining margins have weakened as crude prices have gained at a much faster pace than refined product prices, a third source said.