Prof. ST Hsieh
Director, US-China Energy Industry Forum
March 7, 2023
The root cause of the Ukraine war is Europe’s desire of fossil energy independence. The West led by the US instituted sanctions against Russian energy import to Europe, after the Ukraine war started. It was intended to punish Putin with goal of starving Russian economy to the extent that Putin would have to leave Ukraine alone.
But Ukraine war has no end insight so West led sanctions against Russia has not been successful after more than one year of bitter battles. On the other hand, Europe has been paying very high costs for securing energy, along with rigid energy conservation measures. Europe’s dependence of diesel exports from India and China is even more contradictory. Because India and China have been importing sanctioned Russian oil excluded by Europe cheaply, refine it then export diesel back to Europe with profits.
This vicious diesel market shift, cause by Europe sanctioning Russia, will keep Europe paying for high-cost diesel even after the Ukraine war is ended someday.
EIA MARCH 7, 2023
Data source: Vortexa Analytics, March 1, 2023
On June 3, 2022, the EU adopted a sixth package of sanctions that banned imports of seaborne crude oil from Russia into the EU (effective December 5, 2022) and banned seaborne imports of petroleum products from Russia, including diesel fuel (effective February 5, 2023).
Prior to the sanctions, between October 2021 and September 2022, diesel imports from Russia made up 53% of Northwest Europe’s seaborne imports. In February 2023, when the sanctions took effect, those diesel imports fell to 2%. Although petroleum product imports from Russia have declined, imports from other areas, notably the Middle East and Asia, have increased.
The largest increase in diesel import volumes to Northwest Europe came from Saudi Arabia, increasing to 202,000 barrels per day (b/d) in February 2023 from an average of 68,000 b/d from October 2021 through September 2022. Compared with the same periods, diesel imports from India increased by 110,000 b/d to 161,000 b/d. Diesel imports from China and South Korea, which have not been consistent diesel exporters to Europe, have likewise increased. In February, diesel imports reached 119,000 b/d from China and 45,000 b/d from South Korea.
Although diesel imports into Northwest Europe from the United States fell from January to February 2023, over the past few months, they have been relatively high. From October 2021 through September 2022, diesel imports from the United States averaged 43,000 b/d. Imports from the United States increased to 107,000 b/d from October 2022 through February 2023.
Warm weather, falling natural gas prices, and economic concerns, however, have pushed down diesel prices in Northwest Europe since January 23. The price of ultra-low sulfur diesel (ULSD) in Northwest Europe fell from $3.29 per gallon (gal) on January 23, 2023, to $2.65/gal on February 27, 2023, which is less than the price on February 23, 2022 (the day before Russia’s full-scale invasion of Ukraine).
Data source: Bloomberg L.P.
Although the Northwest Europe diesel price has declined, Europe’s loss of Russia as a significant diesel fuel supplier means it will need to import from more distant regions. Uncertain supply and demand dynamics and the new circumstances around Europe’s diesel imports (importing diesel fuel from farther distances) may lead to price volatility as the markets fully adjust to the new dynamics.
China’s Flood of Fuels May Provide Some Relief to Diesel Crunch
- Refiners to prioritize diesel due to strong margins: traders
- Europe facing deficit of 1.19 million b/d, Energy Aspects says
October 10, 2022 at 2:00 PM PDTUpdated onOctober 10, 2022 at 11:30 PM PDT