Europe looks to the Middle East to replace Russian oil barrels as a diesel supply crisis looms.

Here is Rystad Energy’s oil market note from Senior Vice President of Analysis, Claudio Galimberti:

Road transport demand has been weakening throughout March, driven primarily by OECD countries and less so by China, at least so far, despite news of short-lived, Covid-related lockdowns in some provinces over the past couple of months.

However, Shanghai’s two-week-long, intermittent lockdown launched on 27 March will be amongst the most significant in China thus far this year, due to the size of the population involved (more than 25 million people), with the potential to lower demand by up to 200,000 barrels per day (bpd) for the duration of the restrictions.

Shanghai’s lockdown will give us an indication on the success of China’s zero-Covid policy and whether it will be maintained or abandoned.

Global oil demand has been showing signs of weakness in the month of March and this weakness is expected to persist through April and May due to the impact of high oil prices globally, the negative effects of sanctions and war in Russia and Ukraine,  and  the consequences of increasing lockdowns in China.

Amidst the weakening in oil demand, supply of oil products remains tight. The ICE Gasoil-Brent crack in Europe has been trading around unprecedented levels of $25-30 per barrel for the past couple of weeks, higher than even the memorable gasoil crack spike in 2008.

Russia currently exports around 800,000 bpd of diesel/gasoil to Europe.

As Europe imports between 1.6 to 2.0 million bpd of diesel/gasoil, an effective ban on Russia’s oil product exports could increase the gasoil crack further.

It is important to note that diesel imports from rest of world were on a declining trend before the  war in Ukraine started, and this makes a potential loss of Russian ULSD even more acute.

The lowering of refinery runs in Europe is adding to the swell in diesel cracks.

However, the current shortage of urea, a key component of diesel exhaust fluid, could lead to a reduction in diesel demand for heavy duty trucks which could eventually prevent the gasoil crack from widening further.

Overall, the gasoil deficit in Europe signals that the wide Asia gasoil/gasoline spread is here to stay.

Russian oil flows

It is estimate that between 1.2 and 1.5 million bpd of Russian crude exports have been lost since the start of the invasion of Ukraine on February 24. The destination of the remaining crude exports from Russia (approximately 4.5 million bpd) is increasingly ‘unknown’, although it will likely be Asia, primarily China and India. In the next few weeks, there could be a mass rerouting of an approximate 3 million bpd of Russia’s crude exports from Europe to Asia with a comparable amount of Middle Eastern export barrels being redirected from Asia to Europe. This will have significant implications for the refining system due to the different crude qualities involved.

The OPEC+ meeting on 31 March 2022 will shed light on whether the UAE and Saudi Arabia are willing and able to fill some of the gap left by Russia’s crude export loss.