Russian fuel crisis deepens as drone strikes cripple refineries, supplies tighten

Russia's fuel crisis has deepened as a host of refineries remain offline following repeated Ukrainian drone strikes. while demand remains seasonally strong, and the industry is considering different options for mitigating the shortages.

Between June 28 and Sept. 22, Russia has closed 360 retail stations, or 2.6% of the total, according to OMT-Consult, a Moscow-based think tank. The trend has mostly affected southern regions, where up to 14% of retail stations have suspended operations, and this figure is reaching 50% in the annexed Crimea, according to analysts' calculations.

"The situation seems to be alarming," Tamara Kandelaki, chairman of the Committee on Economics at the Oil Refiners and Petrochemical Association, told S&P Global Commodity Insights. "This [shutdown of refineries] is not a part of a trend, but rather a force majeure that is expected to continue for the time being."

Independent pumping stations, which have been primarily affected, have been operating at a loss since July due to a surge in wholesale gasoline prices, Sergey Kaufman, an analyst at Finam, a Moscow-based financial advisory firm, said in an email.

Russian gasoline spot and subsequently wholesale oil depot prices started to climb in the summer, due to relatively low stocks amid unexpectedly strong summer demand. In order to contain the surge, the government extended the six-month gasoline export ban, which was introduced in March only for traders and small refiners with less then 1 million mt/year capacity, to bigger refiners and also beyond August. However, the measure did not succeed in arresting the price rises, which were breaking record levels and significantly affected the economics of retailers, particularly independent ones.

"We expect that even in a moderately positive scenario, the crisis could last for at least a month, and lead to further suspensions of operations at some independent fuel stations in the near future," Kaufman said. Without the gasoline export ban, wholesale prices would have risen considerably more, Kaufman said.

To help ensure better supply and contain the price rally, the energy ministry announced on Sept. 25 a further extension of the gasoline export ban through the end of the year. It also banned traders and smaller refiners from exporting diesel.

The restriction on diesel exports will swiftly stabilize the situation on the diesel market, where wholesale prices are also on the rise, Sergey Frolov, managing partner of NEFT Research, a Moscow-based consultancy, said in an email.

However, the Russian fuel market remains close to a point of physical shortages, especially of certain grades of gasoline, after a wave of drone strikes on refineries since early August.

"There are risks that the economic deficit we have seen thus far will evolve into a situation when we physically can't manufacture enough gasoline, as the attacks [on refineries] continue," Igor Yushkov, a senior analyst with the National Energy Security Fund and a specialist at the Russian government's Financial University, said in a phone interview.

"Without ensuring the security of refineries, the situation will get worse."

Supply depends upon restart of refineries

The drone strikes have taken offline, fully or partially, the whole Samara refinery hub, Saratov, Volgograd, Ryazan, Astrakhan, and Salavat.

"Given the physical decline in production and the current shortage, administrative measures alone are insufficient," Kaufman said, who added that the solution "will largely depend on the speed of refinery repairs and the success of repelling new attacks."

While analysts expect the refineries to complete repairs in the next three months, the works could face difficulties due to Western sanctions on equipment, but also repeated attacks on the same refineries. Most recently, Novokuybishev was taken offline shortly after restarting from a previous drone strike, while Astrakhan halted processing weeks after resuming operations following an attack in early February.

"There is no other way to resolve the fuel crisis other than providing full security of refining infrastructure and negotiating a withdrawal of sanctions on oil refinancing equipment," Kirill Rodionov, an independent energy market analyst, wrote in a Telegram post.

According to Frolov, to alleviate the crisis, Russia will likely need to resort to importing fuel to the south and the Far East.

One option would be to increase crude exports to Belarus refineries, which could then increase deliveries of oil products to Russia, according to Yushkov.

Belarus traditionally covers shortfalls of supply in Russia during periods of peak demand. However, according to Kandelaki, imports from Belarus can only benefit the bordering regions.

One possible solution floated has been to lower environmental requirements and allow the use of the Euro 3 standard.

"Allowing regional oil depots to blend fuel based on demand, along with changes to component composition requirements, could help [deal with the crisis]," Kandelaki said.

Others include lowering excise duties or raising payments under the damping mechanism, which compensates refineries for selling below export prices.

But in a situation where the federal budget deficit exceeds the target for 2025, it is unlikely that the government will resort to fiscal measures, Yushkov said.