Mediterranean diesel supply tightens as Russian exports tumble

Diesel supply in the Mediterranean is tightening as Russian exports slump due to damaged infrastructure, with Moscow considering an export ban that is fueling bullish sentiment and forcing importers to compete for barrels amid an already constrained global balance, according to market sources.

"Europe is most affected" by the disruptions to Russian energy production, said one Europe-based trader, adding that the "Med is more of a destination than ARA for Russian product."

The same trader said that countries such as Turkey were now "scrambling for molecules" and that "customs are being notified in the region to find alternative supply."

In May, 1.385 million metric tons of diesel/gasoil loaded in Russia for the Med, accounting for 45% of Russia's total 3.073 million mt of diesel/gasoil exports in the month, S&P Global Commodities at Sea data showed. Of the 1.385 million mt of loadings, 1.159 million mt was destined for Turkey, highlighting the country's reliance on Russian product.

Yet in June, total Russian diesel/gasoil exports to the Med fell by 575,000 mt to 810,000 mt, with Turkey taking just 716,000 mt, according to CAS data. This was down 43.9% from the 1.277 million mt that loaded for Turkey in the same month last year.

Russian diesel production and exporting capacity have fallen significantly in the last few weeks, following a series of Ukrainian drone strikes on energy infrastructure.

In the latest wave of attacks, Russia's Yaroslavl (Yanos) and Omsk refineries have been struck, as well as some of Russia's main oil terminals in the Baltic Sea.

Disrupted oil flows out of Russia, which are disproportionately affecting the Med region, are placing some upward pressure on Med diesel prices.

On July 6, Platts, part of S&P Global Energy, assessed the 10 ppm diesel CIF Med cargo flat price up $29/mt to $998/mt, the highest level in the market since June 12. The upward price momentum was largely driven by a strengthening underlying front-month gasoil futures contract, which rose $28.75/mt to $972.25/mt.

However, the cash premium also rose July 6 on the back of a competitive bid in the Platts Market on Close assessment process, widening the Med-NWE spread by $4.25/mt to $19/mt and reflecting the Med's bullish sentiment.

Also, there were 19 bids in the Med diesel cargo MOC, compared with just one trade on a competitive bid for NWE cargoes on July 6, which demonstrates the higher level of interest in the Med. Of the 19 bids, eight had a Turkish basis port, Platts data showed.

Shifting global balances

The impacts of lower Russian export levels extend beyond the direct impact on supply to the Med.

Brazil is another large recipient Russian oil products, now lacking supply. Some 3.2 million mt of Russian diesel/gasoil loaded for Brazil in May. This figure fell to 1.3 million mt in June, and nothing has been loaded so far in July.

With reduced Russian availability, Brazil has started to attract barrels from the US Gulf Coast and India. Brazil was the largest importing country of US diesel/gasoil in June, taking 741,000 mt, according to CAS.

As Latin American diesel prices print higher to compete for supply, trans-Atlantic arbitrage economics may weaken, reducing flows into Europe further.

July may see European diesel prices rally to compete with other regions for limited barrels amid tighter global supply, traders said.