EU sanctions package on Russian oil set to reshape European diesel and jet trade flows

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Gary Clark:

Hello and welcome to the Platts Oil Markets Podcast by S&P Global Commodity Insights, where today we will be talking about the European middle distillates complex, which has been rattled by Middle East tensions and has to contend with the European Union's 18th sanctions package against Russia announced on July 19th. And we'll see imports of fuels refined from Russian crude in third countries banned starting January the 21st, 2026. India, Turkey, and to a lesser extent China, refine Russian crude such as Urals and export diesel and jet fuel to Europe. Early signs suggest refiners in India, which is a major exporter of middle distillates to Europe, is still importing Russian crude. Although imports have dipped. While the framework or mechanism by which traders can identify what constitutes refined products made from Russian feedstock is unclear.

I am Gary Clark, and I manage the EMEA clean refined products price reporting team based out of London. I'm joined by Nadia Bliznikova who leads our price reporting on diesel markets, and Aruni Sunil, who reports on jet fuel.

Coming to you first, Nadia, Russia was the main exporter of diesel to Europe, but when the EU banned imports of Russian oil products in February 2023 after the onset of the Russia-Ukraine war, the market reaction, the time the sanctions came into effect was quite muted, right? However, in the months ahead of that deadline, there was an incredible amount of price volatility. As market entities self-sanctioned, Europe stocked up on Russian oil ahead of the import ban, and supply chains readjusted to take non-Russian oil while Russia found new markets in Africa and beyond. How has the European diesel market reacted to news of the latest round of sanctions?

Nadia Bliznikova:

Yeah, so the European diesel market is bracing for yet another test ahead of the January 26 new sanctions package, because over the past few years, refineries in India, Turkey, and parts of Middle East, have run significant volumes of Russian crude and have become an important part of Europe's import mix. But now these routes are at risk again. So refineries in India, which sends six to seven LR2s of diesel to Europe each month will be asked to prove that its barrels are not derived from Russian crude. And this is not straightforward, because many refiners run mix-slates with Russian crude constituting only some part of their feedstock.

And the exact enforcement mechanism for this measure has not been clarified yet, and which, this has left market in a bit of a wait-and-see mode. For instance, we have not seen major stockpiling in Europe has happened before the February 2023 sanctions, as you said, nor massive increases in prices or the backwardation in the forward curve yet.

And partially, this is because of the current tightness and the relatively mild backwardation in the market, which makes uneconomical. And also partially because traders don't yet know exactly how these sanctions are going to be enforced. So whether refineries will be required to prove that their crude slate is mostly non-Russian, or whether they'll have to prove they have not processed any Russian crude then, over a certain period of time, that's not yet clear. But the two scenarios will have massively different implications.

Gary Clark:

I see. And so that's interesting. So you're saying we're not really seeing a market reaction at this moment in time. No pricing in to a certain extent in the forward curve. So I mean, our trade is saying there's potential, we saw what happened last time, right? The EU sanctions came in, or ahead of the EU sanctions. Is there upside ahead, downside ahead or...?

Nadia Bliznikova:

But I feel like the market's a bit more desensitized now because the flows have readjusted before with bigger shocks and supply chain disruptions. So now, the market kind of feels confident than something will be worked out again.

Gary Clark:

I see, I see. And a big factor of the price volatility that we saw ahead of the February 2023 sanctions coming into effect was self-sanctioning in the market. Are you observing any self-sanctioning within European diesel markets?

Nadia Bliznikova:

Yeah, so earlier this month, Ukraine announced that it will be banning imports of Indian diesel starting from October 1st, which is ahead of the EU measures. And India, who has become the largest consumer of Russian crude since the start of the war, has also emerged as Ukraine's single biggest diesel supplier, covering about 18% of its imports in August, this August.

And much of that supply has moved via Poland and Romania to Constanza on Romania's. Black Sea Coast became the largest diesel importer in the Mad Black Sea region in 2024, effectively serving as a lifeline for Ukraine since the war.

Another important consideration that comes into play is product quality. So many European countries, and especially Ukraine, requires stringent coal properties of diesel in winter, that generally only Indian product can meet because of the good Russian crude that it runs.

Another country is Kuwait, but whether these volumes will be sufficient or not is not yet clear. So how Ukraine is going to cover itself in the absence of Indian diesel is a big question mark. US generally has good coal properties, but its volumes come on, MRs, and discharged mainly in the West Med or ARA, and still sometimes doping the CFPP to the desired level in winter is not always possible.

And that raises a real concern heading into winter. If Indian supply is blocked, Ukraine could face a shortage of winter barrels, pulling more on limited med supplies and tightening balances across the region.

Gary Clark:

And of course, this is all predicated on countries such as India, Turkey, or China, continuing to process Russian crude, right? They might decide to not process Russian crude, in which case we will see bigger effects, presumably, in the crude market, which could have knock-on effects obviously to refined products as well. But Europe isn't only reliant on imports of diesel, but also jet fuel. How has the market reacted to the sanctions news, really, for jet fuel?

Aruni Sunil:

For now, it seems like the general balances of the European jet fuel market will remain largely the same with the 18th sanctions package coming in in Jan. It seems that Europe will still meet its import needs, but the market expects more Russian crude to be exported from India into the Middle East instead of direct exports from India to Europe. And, which will lead to higher volumes from the Middle East to Europe.

And Europe is net import or jet fuel, like you mentioned, and takes the bulk of its jet from Middle East and India in typical market conditions. But these volumes from the Middle East are expected to go up next year with the sanctions coming in.

There's also, diverted flows are expected to lead to higher freight costs in the jet fuel market. And that seems to be the biggest thing that's standing out to market participants right now.

Gary Clark:

I see. Because we know with respect to freight, right, jet fuel, gasoline, diesel, they're all carried on the same kinds of tankers. So a freight effect with respect to jet fuel tankers could also affect diesel, for instance, right? These big LR tankers, which are coming from east of Suez markets into Europe.

Aruni Sunil:

Yeah, and Europe might also price higher to pull barrels from different locations as these supply chains vary. And China is also a major supplier of jet fuel to Europe, and the market's expecting Chinese exports to go to South Korea and then be re-exported to Europe when the sanctions come into effect.

But Chinese export quarters for 2026 have already been set at around 40 million tons of gasoline jet and diesel in total. So these volumes can be expected even if the supply chains get longer next year.

And another thing that's worthy of noting is that global jet fuel supply chains are currently already longer than usual, and it's already leading to higher freight costs ever since tensions in the Middle East escalated in late 2023 with the Houthi attacks on ships in the Bab-el-Mandeb Strait, and then vessels having to divert around the Cape of Good Hope since then. So while flows through the Suez have picked back up in the last few months, more ships are still diverting around the Cape.

Gary Clark:

And I think another thing worth mentioning, right, is the Dangote refinery is exporting both diesel and jet fuel, and to an extent provides somewhat of a supply buffer, assuming it hits a steady state level of operations come the time the sanctions come in. What about the U.S.? Is that a potential exporter, has been exporting diesel and jet fuel to Europe? Is that something we expect to continue or even pick up?

Nadia Bliznikova:

Yeah, well they are exporting, but whether the volumes are enough or not is a question. Also, I think especially heading into winter cold properties is a big, big thing for many countries. And last winter we saw that, one of the CFPP, the cold filter plug-in point was not always dopable to the desired level.

Gary Clark:

For U.S. barrels.

Nadia Bliznikova:

For U.S. barrels, which means that it couldn't always go to the homes which required it. And I think in Europe, yeah. Well obviously that ties into the jet market, right, Aruni, because that same refiner is blending in more jet into diesel to achieve the coal properties, which could then strengthen both markets, jet and diesel.

Gary Clark:

And what are the traders you speak to saying about the outlook then for jet fuel and diesel going forward? Maybe if I come to you first, Aruni?

Aruni Sunil:

Yeah, yeah, like Nadia said, I think one of the things that's one to watch is that with the sanctions coming in the market does expect more jet fuel to be blended into diesel to meet those coal properties that Indian diesel meets at the moment. And if Europe can't have that, can't import this Indian diesel, then more jet fuel will have to be blended in and this will further tighten the European jet fuel market. And as we know this year, Europe is already importing a lot more compared to last year to make up for lost supply with refinery closures, for example, in Europe.

Gary Clark:

So that would be Grangemouth, Lindsey, for example, right?

Nadia Bliznikova:

Yes.

Aruni Sunil:

Yeah, and I think with us imports, as we were saying, another thing is for jet fuel spec DEFSTAN A1 is, yeah, it's a different spec to the U.S. jet fuel, so those flows, that's something to keep in mind as well.

But it seems like the market is on a wait and see mode on how exactly the sanctions will be implemented. But it seems to be that the consensus for now is that general balances won't change as long as the market has enough time to react to the implementation. And based on, like Nadia said, how the market has reacted to heightened volatility over the last few years, and this kind of geopolitical volatility has become kind of the norm. Participants seem confident that the market will be able to readjust promptly to the 18th sanctions package coming in January, which is also limiting the risk premium down the forward curve for jet fuel.

Gary Clark:

I see. And supply chains certainly have been incredibly resilient given all of the shuffling around as a result of the geopolitical tensions and conflicts we see in the world today. And what's the story going forward that you are hearing about for diesel, Nadia?

Nadia Bliznikova:

Yeah, so the supply chains would need to be rerouted again, but Indian barrels push towards markets like Brazil or Australia or Latin America, while Europe would be competing harder for the compliant Middle Eastern or US product. And then Turkey's role as a swing producer will grow. But Turkey has its own balancing act between Russian and non-Russian supply. And then Germany's weaker economy means less Baltic diesel available for re-export, which would further narrow Europe's options.

So in the end, supply chain will adapt as it has done already, but not without costs. Higher freight, tighter availability of winter-grade barrels and pressure on inflation are the likely outcomes in the months ahead.

Gary Clark:

Understood. And then the old age tussle between jet fuel and diesel prices, right. Jet fuel's typically the premium product above diesel, but indeed diesel and jet fuel prices do compete with each other as refinery yields compete to produce more jet fuel versus diesel and vice versa. Diesel is above jet fuel right now. What does that tussle look like going forward?

Aruni Sunil:

Yeah, that's an interesting one, because we've seen over the last few months that even though it was summer and which is seasonal, demand is high for jet fuel in summer with quality flying. But diesel has been stronger than jet over the last few months. And the regrade for jet fuel has been weak. So refineries have prioritized diesel over jet.

But currently the jet fuel market is in a evacuation in outright swap structure. And a lot of that strength is still coming from the strength in the diesel market and in ICLS-GEO. So it's a very diesel-dominated market now, and the market participants are expecting this to continue into the first quarter of 2026 with the sanctions coming in as well.

But yes, so the forward curve is looking strong but not as strong as diesel. And it is pricing in some of that risk premium from potential supply disruptions from incoming sanctions. But there's also a little bit of strength coming from upcoming year in travel demand, for example, and also from strength in diesel. But on the flip side, there's also stocks in the Amsterdam, Rotterdam, Antwerp refining hub, which are at a four-year high now.

Gary Clark:

For jet fuel.

Aruni Sunil:

For jet fuel, which is offsetting some of that upside as well, down the forward curve. And yeah, risk premium had peaked from the Middle East tensions when Iran attacked Israel in June, but has been priced out since then. And for now, geopolitical risk premium remains largely limited to higher freight costs for ships diverted around the Cape. And that's most the bulk of it for now.

Gary Clark:

Understood. So indeed, a lot of uncertainty around what the framework or mechanism is going to look like, with respect to how you identify oil products made in third countries from Russian feedstock. But there seems to be a little bit of a market consensus with respect to the fact that supply chains have been very resilient, will readjust should these third countries continue to process Russian crates, but maybe some short term disruption potentially. But as we know from following the news, the new cycle is fast and things could change very quickly.

Thank you, Nadia and Aruni, and thanks for listening. Keep up to date with Platts Live for the professional platform built exclusively for the energy industry. Have your say, and join the conversation at Plattslive.com.