Commodities 2022: Russian refiners focus on upgrades to meet surging demand

Russia's refining sector will focus on increasing output and implementing other state-directed measures in 2022 in order to mitigate "exceptional" seasonal price surges in oil products as domestic demand surpasses pre-pandemic levels, according to analysts.

The unusually strong domestic demand for gasoline and diesel seen since last summer was driven by an increase in domestic tourism due to restrictions on international travel amid the coronavirus pandemic.

"The past year was exceptional in the context of demand for oil products in the summer season," Sergei Kaufman, an analyst at the Finam investing group, told S&P Global Platts.

Domestic deliveries of gasoline in January-November 2021 were 4.7% higher than the same period in 2019 at 33.3 million mt, while diesel supplies were 4.0% higher than the pre-pandemic level at 35.9 million mt, according to energy ministry data.

At the same time, lengthy refinery turnarounds, which saw works at a number of refineries overlap and continue longer than planned meant supply struggled to keep up with the rise in demand. As a result, gasoline prices at the pump surged faster than inflation, increasing by 9.3% since the beginning of 2021, according to Rosstat data.

Similarly, diesel prices have been on the rise since September, when the switch to grades with more stringent cold properties started, with the energy ministry instructing refineries to increase output to avoid shortages during the peak winter period.

"The factor of growing domestic tourism reached its peak in 2021, when international travel during the holiday season was extremely limited. Partially because of this, the demand for oil products in the past year has already exceeded the pre-pandemic level," Kaufman said.

In 2022, wider approval of Russian vaccines overseas and increasing international travel will only slightly reduce domestic demand for oil products, he added.

S&P Global Platts Analytics expects transport fuels to continue to be supported by rising mobility, despite some slight downward revisions due to the third wave of coronavirus in Russia and the emergence of the omicron strain.

Meanwhile, the International Energy Agency forecasts an increase in Russian oil demand of 120,000 b/d year-on-year in 2022 and expects it to exceed pre-pandemic levels by 190,000 b/d. The IEA also noted that "based on the strength of domestic aviation" Russia's Q4 jet/kerosene demand is marginally higher than 2019.

State measures

To help regulate domestic markets, the Russian government is preparing further amendments to the so-called damping mechanism, as more price surges are expected in the new year, when both the excise duty and the indicative price used for calculating the damping mechanism are set to rise.

The draft document should be ready for review by the end of this year, energy minister Nikolay Shulginov said Dec. 14, and could enter into force in January.

In addition, Russia is looking at a gradual increase in the obligatory minimum volumes oil producers are required to sell on the St Petersburg International Mercantile Exchange floor. Currently, minimum gasoline volumes are set at 11% of output and diesel volumes at 7.5%.

"The issue of minimum sale volumes on the exchange should be solved dynamically. If there is a surge in demand, it should be increased, because this is one of the effective methods of curbing spot prices for gasoline and diesel," Kaufman said.

As the Russian energy ministry expects domestic demand to increase even further in the near future, it hopes fuel supplies will rise in the wake of refinery upgrades.

Spikes in demand, such as were seen over the summer of 2021, should be able to be met when more refineries have completed upgrades, Anton Rubtsov, director of the Oil Refining and Gas Complex Department at the energy ministry, said at a recent oil forum.

In 2021, the energy ministry agreed on investments for upgrades at 14 Russian refineries, aimed at increasing output of gasoline and diesel. The measures to encourage upgrades are also aimed at smaller refineries.

"The government already signed a number of agreements providing incentives in exchange for modernization. I don't think it makes sense to further speed up this process," Kaufman said.

Furthermore, some companies, including Rosneft and Gazprom Neft, intend to move scheduled maintenance works as far away from the peak season as possible to increase fuel supplies during the period of higher demand for oil products.

"All these measures being taken... allows us to hope that we will be able to keep the situation within the predicted inflation in 2022," the deputy head of Russia's Federal Antimonopoly Service Vitaly Korolev said Dec. 10, adding that the past year was "quite volatile and in places nervous."

"I don't think that 2022 will be the same," he said.