Listen: Diesel and tanker markets react to bombed Russian refining infrastructure

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Joel Hanley: Hello and welcome to the Oil Markets podcast from S&P Global Commodity Insights. I'm Joel Hanley. Ukraine has stepped up its offensive strategy to take the war behind Russia's border. What do these latest attacks on energy infrastructure mean for oil and freight markets?

The world has been living with the knock-on effects of Russia's invasion of Ukraine for over two years now, and as the war grinds on, new impacts are being felt as the war ebbs, flows and indeed, evolves. Now, as a Ukrainian drone has hit a refinery in Tatarstan, nearly 1000 miles from the Russia-Ukraine border, it appears an emboldened Ukraine is now taking the war beyond Putin's doorstep. What does this attack on the Nizhnekamsk refinery and other facilities in Russia mean for the oil markets? Well, with me to discuss just that on this episode of the podcast are three colleagues from different teams. One is a news reporter, one is an analyst, and the other is a price reporter. So I can welcome respectively Tom Washington, Rebeka Foley and Nadia Bliznikova.

Tom, let's start with you. There seems to be a lot more attacks in Russia of late. This is no longer just Ukraine repelling invaders anymore like the U.S. would probably prefer. This is much more aggressive. So what's been going on and what does it mean for markets in your view?

Thomas Washington: Yeah, the latest attack on April the 2nd was on Russia's Taneco refinery and the most significant thing about this really is that it's a long way from the border and so it expands the radius, the capability of these Ukrainian drones and that has sent some jitters through markets. Obviously that has implications for the products themselves, but these products of course have got to get to markets and everyone in the tankers is looking nervously at this space and wondering just quite which way we're going to go. I would say that, for now, the implications of this are a little unclear.

In terms of tanker rates to take product from the Black Sea, they looked to have dipped down a little bit. I don't think you should read too much into that just yet. I'd say for now it's a wait and see game, but there is certainly the prospect that there will be less product to take both from the Russian Baltic, the Russian Black Sea. These products of course will have to now go beyond Europe, because of the embargoes on refined products there from Russia. Shipping is of course a highly integrated market. When the embargo first came in on Russian products, it was really the Persian Gulf that proved the popular alternative. And the last data I've been looking at has suggested that over the last few weeks, as I might add, these drone strikes have been remaining focused and increasing in number, volumes from the Persian Gulf do seem to have picked up a little bit.

Joel Hanley: Right, so one would imagine then that the security of supply, and let's be honest, this is a security of supply issue for many people, if your confidence is shaken in a regular flow, then naturally it's going to... You might start looking elsewhere. So increasingly that's what people are doing, you think?

Thomas Washington: Yes, I'd say that's exactly the case. For now, we are a little bit in wait and see mode. But yeah, what confidence there was in Russian exports is shaken further.

Joel Hanley: Right, and I don't suppose that will necessarily impact the crude so much, but we have seen a bit less crude coming out of Russia recently anyway. But Rebeka, you're looking at global trade flows and so on and I know that a major part of your work, indeed our analytics team over the last couple of years, has been tracking those flows and reshaping the whole global trade flow really when it comes to oil in particular. What are the latest comings and goings for Russian oil?

Rebeka Foley: Absolutely. I think we can all agree it certainly has not been a dull moment in diesel markets. Zooming in lately, we've seen actually Russian gas oil exports steady in March and February. Of course there's been a lot of discussion about impact from geopolitical events, of course the Red Sea as well. Interestingly, we did see those exports pretty stable in March and February at around 940,000 barrels a day. And it's of course important to remember that Russia is not feeding these key demand centers in terms of diesel anymore. We've had a year, just over a year, of sanctions from the EU against Russian imports of refined products, and we've really seen those Russian cargos reroute. Of course Brazil is soaking up a lot of those volumes and we have Russian exports also heading to Turkey and we see those flows remaining and there's no reason why that won't continue.

If we look at the recent attacks, as I said on a monthly basis, Russian exports have been steady. They've come down a little bit on a weekly basis, but it's interesting to see, as well, the impacts globally of how we've seen global gas oil trade reshuffle. As I mentioned, Russian gas oil exports have been heading mainly to Turkey and Brazil and some other markets, and as a result, we've seen Europe actually get its product from other places, like the Middle East, like India and like the U.S. Interestingly, of course we've had disruptions in the Red Sea, everything happening at once now and a lot of discussion about where Europe will get its diesel from. But we have to remember as well, we've had some macro weakness, of course, in Europe as well that has, of course, impacted prices.

Joel Hanley: Yeah, don't tell the crude oil price that, because for all the macro weakness in Europe, we certainly seem to be seeing elevated crude oil prices breaking out towards $90 barrel at the moment in the futures world. And that's a price that hasn't been hugely impacted, particularly after the original invasion. But because there is simply enough oil around. There's plenty. The Saudis can turn on the taps a bit more if they wanted to. OPEC has been very restrained and the Red Sea attacks didn't really seem to make much of an impact on the flat prices. Now, as we start to see maybe Israel and Iran escalating, naturally I think on the crude oil price, and therefore the knock-on effect on distillate prices as well, that is having a bit of an impact. And on diesel cracks themselves then, Rebecca, and I'll ask you, Nadia, as well, who covers diesel for us in the price reporting team, what are you sensing there when it comes to diesel cracks?

Rebeka Foley: It's been really interesting to watch. We've had diesel cracks soften recently despite just a myriad of geopolitical events at play. We have Red Sea disruptions, longer voyages for ships going around the Cape of Good Hope, concerns about supply in Europe, demand coverage, and at the same time, we've had diesel cracks soften. And that actually isn't just a European story. We've had diesel cracks soften in the U.S. as well and in Singapore.

One of the more interesting dynamics I think actually from a global perspective is that, due to the Red Sea disruptions, we've had this interregional widening of cracks between the Atlantic Basin in Singapore and, amid all the uncertainty in the market, that's something that we expect to remain in the near term, because of disruptions to trade flows mainly due to the Red Sea. But lately, we've had diesel cracks come down in Europe, they've come down in the U.S. and that's happened despite low stocks in the U.S. Interestingly, as I said, Europe's been able to cover some of those import losses from other markets, from the Middle East and India. And more recently, because of the Red Sea, we've seen a big increase in European imports of diesel from the U.S. And some of those U.S. volumes have been freed up by Russian diesel heading to Brazil.

So we've seen this reshuffling and diesel crack softening really is an indication that the market is rebalancing, market structure is also easing and that there really just isn't that much concern at the moment about prompt coverage. There's also expectation in the market, of course, for refineries to come back from maintenance in Europe and that will increase supply, and we also have expectations for an uptick in Middle Eastern exports to Europe, as they also come back from maintenance. So the market is really expecting a little bit more of these balances to ease and we're really seeing that both in cracks and prompt structure.

Joel Hanley: One damaged Russian refinery doesn't make a global shortage of diesel, I appreciate. But Nadia, are you seeing what Rebeka was saying playing out here in Europe? The things that you are assessing at the moment, are people reporting any increased tightness at all? Or do we seem plentifully supplied?

Nadia Bliznikova: So as Rebeka pointed out, and perhaps a little surprisingly, the drone attacks have not had a discernible impact on the European market so far. Although the loadings from Russia have gone down since the attacks, there is still a lot of Russian diesel on the water, so it will take some time for the impact to materialize. Market participants are saying that the impact will actually be felt much more on the exports going into second half of April or even May. But for now, Europe remains well supplied and differentials have been on a downward trajectory since at least mid-March.

This is also because the diesel flows from the U.S., Arab Gulf and India to Europe have resumed. Almost 400,000 barrels per day was due to arrive to Europe from the U.S. in March, which is the highest recorded level since July 2017. Since the U.S. refineries have returned from maintenance, they significantly ramped up their exports across the Atlantic. And in a sense, the U.S. really came to Europe's rescue given the short domestic supplies and the reliance on inventory draws in March. And then the next two largest supplies have been Saudi Arabia and Indian, which sent over 500,000 and 300,000 barrels per day respectively. Previously, the Red Sea risk premium and higher freight rates were preventing flows from the east of Suez, but subsequently the market has adjusted to longer voyages and the strength in European distillates has become sufficient to absorb the higher freight costs.

Joel Hanley: Can I stop you there? Because many Americans would tell you it's not the first time they've come to Europe's rescue during a war, but what I would say though is I guess that the impact of these attacks wouldn't necessarily change the very, very short-term supply, but it must knock the sentiment. I imagine that there is more uncertainty in the market and I guess that leads to volatility, because we haven't seen as much volatility as we might've expected over the last year, because of plentiful supply. Are you sensing from trading sources, or are you seeing it in the short-term paper market, any potential choppiness, or an increased sense of volatility?

Nadia Bliznikova: Yeah, exactly. So the increase in diesel flows to Europe has staved off concerns about supply shortages for now in the short term. However, the upside risks still remain as Europe is gearing up for a heavy spring refinery maintenance season. Some refiners are already undergoing maintenance and others are due to start in April. Additionally, the market is expecting a seasonal uptick in demand, which, with the agricultural season starting in April in Europe as well, and unexpected outages such as the one we had recently at Total Energies, Antwerp, which started on 21st of March, that could also pose additional unplanned supply risks and all of these domestic factors, coupled with a tax on Russian infrastructure, could leave Europe exposed during the peak maintenance season.

Thomas Washington: If I can just add to that, it's something that the tank guys that are looking to as well, because whilst Russia has said that they can adjust the maintenance schedules, they can tweak output from different refineries, any kind of shuttling back and forth between them does also add this idea of volatility. And again, on the sentiment side, it'd be interested to see how that plays out.

Joel Hanley: That's great, Tom. That's a good point. So we've covered supply. Rebeka, what about the demand side?

Rebeka Foley: For sure. There's so much focus on the supply side of the story, I think we need to remember that there's also a demand story here. From the macro perspective, we're really only expecting mild growth of about 0.5% in Western Europe. And sure, it's not contraction, but it's very, very mild. Of course, manufacturing remains in contraction mode, way down most recently by France and Germany. These are certainly impacting the demand story. And from a weather perspective, weather recently in the U.S., we had a cold snap, but March heating degree days were 18% below the 10-year average after February was about 10%, and European temperatures have also been warmer than normal in February and March. So from a heating degree perspective, temperatures, macro perspective, manufacturing, these are not supportive factors from the demand side. And we also expect that diesel demand has actually peaked in Europe. So that's something, if we zoom out a bit, is important to consider as well.

Joel Hanley: Great. Well, I think that's a perfect place to end, Rebeka. Thank you very much for joining us today and thank you also Tom and Nadia as well. And thank you for tuning in. You can stay ahead of the changing relationship between geopolitical risk and the price of oil with the Platts Energy Security Sentinel, an interactive editorial project analyzing the factors that have helped insulate markets from the risk of supply disruptions. You can explore the Sentinel by visiting the link in the show notes. This Oil Markets episode was produced by Felix Fernandez in London.