Russia Bans Diesel Exports To Squeeze Oil Market

Russia has banned the export of petrol and diesel as crude oil prices climb towards $100 per barrel. This is a major escalation, which will cause concern that Moscow is weaponising its oil supply in response to Western sanctions.

After the announcement made on Thursday, diesel prices in Europe rose by almost 5 percent to over $1,010 per tonne. Brent, the international benchmark for crude oil, rose 1 percent to $94 per barrel.

Russia has been a major producer and supplier of crude oil, and diesel, and is a world leader in the production of diesel. The deal between Saudi Arabia and Opec+ has already reduced its crude exports, contributing to the 30 percent increase in oil prices that occurred since June.

Market participants are worried that Russia is tightening its oil supply, at a moment when central banks struggle to control inflation and as crude prices are poised to rise above $100 per barrel for the 1st time in 13 months.

Henning Gloystein, of Eurasia Group, said: “Russia wants Europe and the US to suffer and they look like they are now repeating their playbook from the gas market in the oil markets ahead of the winter. They’re showing they haven’t finished using their control over energy markets.”

The Kremlin claimed the ban would be “temporary”, and was intended to combat rising energy costs in Russia. However, it did not give a timeframe as to when the measure would end. It also made only limited exceptions like its overseas military bases. The timing of the ban will cause suspicion in Western capitals, that Vladimir Putin is once again using Russia’s power to influence energy markets.

After its full-scale invasion of Ukraine, Russia increased the use of natural gas cuts to Europe. This triggered a global energy crisis that stoked inflation and harmed industries and consumers worldwide.

Gloystein stated that “Russia claimed last year that the gas supply cuts were only temporary, but they continued to tighten the noose.” “As winter approaches, targeting diesel would easily push oil prices back over $100 per barrel with all of the negative consequences that this brings to the global economy.”

Diesel fuel is the mainstay of the global economy. It plays a vital role in the transportation, shipping, and aviation industries. Winter price spikes are especially common for derivatives of diesel, such as heating oils. Germany and the US northeast are heavily reliant upon fuel to heat homes.

The refined fuel market is already tight due to the high demand and refinery repairs over the summer. Pump prices are becoming an issue for US President Joe Biden, and other leaders.

Donald Trump, the Republican frontrunner for the 2016 presidential election, has accused the Biden administration of neglecting domestic oil producers.

Trump said he would force Ukraine to negotiate if he became president for the second time. This has raised questions about whether Putin could try to influence the election next year.

Helima Crockt, RBC Capital Markets, said that while Moscow might have some short-term supply problems at home, the Kremlin may be aiming to “demonstrate its willingness to weaponise their oil supplies” by cutting exports.

“Russia still wants chaos. They still want to break the West’s resolve to help Ukraine. “Putin seems to want to see what the US Presidential election will be like next year.”

Last year, the International Energy Agency reported that Russian refiners produce “roughly twice as much diesel to satisfy domestic consumption and export about half of their annual production”.

According to Kpler, an analytics firm that analyzes freight data, Russia is the second largest seaborne diesel exporter in the world after the US. Before its invasion of Ukraine, it was the biggest diesel exporter in the EU.

Since February, the EU and US have banned imports of Russian refined fuel. This has forced Moscow to redirect its sales towards Turkey, and countries in North Africa and Latin America.

The G7 advanced economies also tried to impose price caps on Russian oil sales while Western countries increased diesel imports.

Russian refinery fuels, notably diesel, are still a vital part of the oil supply. According to Kpler, in August Russia exported over 30mn barrels (a proxy for diesel) of gas-oil and diesel by sea.

Kpler said that Russia exports less petrol than other countries, with only 90,000 barrels of seaborne gasoline per day.

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