Forced flows: How new European sanctions are reshaping Asian gasoil and jet fuel markets

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Jonathan Nonis:

Hello and welcome to Platt's All Market podcast, a series by S&P Global Platt. Today we're taking a deep dive into one of the most consequential policy shifts affecting all markets right now, the impact of new European sanctions on refined products made from Russian crude and what this means for the Asian gas, oil and jet fuel markets. Europe has tightened restrictions aimed at closing loopholes that allowed refined products processed outside Russia, but derived from Russian crude to flow back into the region.

While the regulation in Europe is in origin, its ripple effects are being felt well beyond the Atlantic Basin. Asian refiners, particularly those processing discounted Russian crude have become an increasingly important source of gas, oil and jet fuel supply into Europe in recent years. As these flows come under greater scrutiny, implications for Asian product balances, pricing, refinery economics and arbitrage flows are significant. So what does this mean for Asian middle slip markets? Could barrels be displaced into Asia? Will Europe compete more aggressively for non-Russian origin supply and how might pricing benchmarks such as the FOB Arab Gulf and the FOB Singapore gas jet fuel respond?

I'm Jonathan Nonis, Associate Editorial Director and your host for today. To unpack these themes, I'm joined by members of our Asian editorial team, Mei Huey and Rachelle, who have been closely tracking refined product flows, sanctioned compliance and arbitrage dynamics across Asia and Europe. Europe has introduced tougher rules targeting refined products made from Russian crude, even if they've produced outside Russia. So to begin, how significant is this change in practice and how exposed are Asian refineries, particularly those in India, China, and the Middle East, to these restrictions? Rachelle?

Rachelle Teo:

Hi, Jon. So the real effect of this change we be seen in how the sanctions are being enforced. So starting from 21st of June 2026, the European Union will no longer allow the import of any refined oil product, including gas or diesel and jet fuel that is produced from Russian origin crude regardless of where the refining takes place, though this measure closes one of the biggest remaining gaps in Europe's energy sanctions framework. And this primarily affects India, Turkey, and to a lesser extent, China. South of 2022, these countries drastically increased their purchases of discounted Russian crude and became key exporters of middle distillates to Europe.

The EU's guidance specifically flexed these countries as higher risk. So if you want to bring in all products from these countries, stricter due diligence and documented proof of crude origin is required. So we're now understanding, India faces the biggest risk. So over the past two years, Indian exporters have become major suppliers of metal distillates to the European market. And the new rule does not outright ban barrels originating from India, but any barrel that can be traced back to Russian crude will essentially be problematic for EU buyers unless the origin can be completely disproved. So for a refinery step process, mixed crude slates, proving a clean origin can be operationally really quite difficult.

Jonathan Nonis:

Thanks, Rachelle. And maybe Mei Huey, you might be able to tell us how these new sanctions disrupt those arbitrage flows, and are we already seeing changes in trade patterns or buyer behavior?

Mei Huey:

So what these sanctions introduce is friction rather than a complete stop to Asia-Europe arbitrage. For the past two years, Asia-Europe outflows have functioned largely on price signals. Now these sanctions add another layer of consideration, which is paperwork. Under the new framework, refiners must now certify that no Russian crude was processed in the 60 days prior to product loading, especially when crude slates are mixed on multiple terminals are treated as a single installation.

So this has led to delays and even compliant loadings in which refiners have actively shifted to non-sanctioning feed slots. We have clearly seen preemptive behavior ahead of the sanctions. Ship tracking data shows a jump in EU-bound middle distillate shipments in late 2025, followed by a slowdown as buyers pause to reassess compliance risks. So yes, these flows are now being disrupted, not because the arbitrage flows will stop entirely, but because future trades will be slower, more selective and more conditional than before.

Prior to the Jan 21 sanctions deadline, we have seen some refiners already self-sanctioning in their purchases. India's largest refinery, Jamnagar refinery, has not imported any Russian crude since November 2025 until now and have in state, turned to crude supply from the US, Brazil, Mexico, and the Middle East. However, buyers in the European Union may still reject reliance or products due to the difficulty of descending if the same refinery or the same port terminal have received Russian crude in less than 60 days before the loading of the product.

And so these buyers prefer to avoid India-origin, middle distillates altogether to earn a safe site. Weekly exports of middle distillates from India have also been falling steadily across January with no jet fuel loadings at all in the week of Jan 12. So these days the market is also seeing more and more Indian gasol and jet fuel cargoes routed from Northwest Europe and are instead going to its Persian Gulf as well as Africa. China, on the other hand, tells a different story. The majority of Russian crude imports goes to the smaller teapot refineries as opposed to state-owned majors. And the bulk of these Russian-derived middle distillates is used for domestic eSage rather than export.

Jonathan Nonis:

Thanks, Mei Huey. Now back over to Rachelle. Some of these barrels can't go to Europe. Could Asia's oil product lengthen and what does that mean for prices?

Rachelle Teo:

Asian [inaudible 00:05:34] could become longer, yes. So barrels that would normally flow into Europe stay in the east of Suez. Asia's supplies of gasol and jet fuel will lengthen, especially when demand in the region generally grows steadily, but you wouldn't really see sharp spikes. So in that situation, the pressure point becomes price spreads in Singapore, specifically, cracks and differentials tend to absorb surplus volume when there are a few export options. Analysts also pointed out that Asian middle distillates prices are highly sensitive to small shifts in where barrels can be cleared. This vulnerability persists even when refineries are operating at full capacity. That's it. Flows are more than one-dimensional. So things like the re-opening of the Trans-Pacific or West-West arbitrage routes, seasonal specs in demand and unexpected refinery shutdowns has still pulled barrels from Asia. The key difference is that Europe is no longer somewhere that excess Asian supply can flow as easily as before, and the limits outside for Asian refining cracks when the market is being oversupplied.

So now when we look at the 2026, Q2-Q3 Asian gasol in the quarter [inaudible 00:06:34] spread. We actually see a wider backwardation when we compare the December and January month-to-date averages, so the spread actually gone up about more than 30% in a month. Same for the Asian jet fuel kerosene crack that saw more than 60% on-month increase. What this means is on top of it already weak Asian middle distillate complex, the market is eyeing even more weakness down the road. It's interesting to note for now that the east of Suez is fairly weak as market participants have also told us. So Indian barrels have no incentive flowing into Asia. The market has reflected that Indian barrels are now flowing into the Persian Gulf, thus also saying that for jet fuel, supply balances aren't actually all that much impacted.

Jonathan Nonis:

Thanks, Rachelle. So does Europe still need diesel? Where will their incremental supply come from? Maybe Mei Huey can shed some light.

Mei Huey:

Thanks, Jon. So Europe's underlying diesel deficit will still remain, but what these sanctions change is who can most easily fill this deficit? As Asian barrels processed from Russian crude are no longer accepted, the Middle East and the US Gulf Coast have emerged as the primary alternatives. Both of these regions have already expanded their role as suppliers after Europe banned direct Russian diesel imports back in 2023. The Middle East in particular is structurally well positioned. Refineries in Kuwait, Oman and Saudi Arabia have clear non-Russian supply chains, which carry much lower compliance risk for European buyers. This however, does increase the competition for these Middle East barrels, especially during maintenance periods or seasonally higher demand during the winter.

Jonathan Nonis:

Thanks, Mei Huey. So how are sanctions influencing pricing structures like Singapore gas jet fuel differentials and the East-West arbitrage? Rachelle, maybe you might have an answer.

Rachelle Teo:

Yeah, so the sanctions will lead to increased volatility in spreads. So with higher compliance risk, buyers naturally become more cautious, which in turn thins liquidity and causes spreads to swing more sharply to small physical shifts. So in Asia, the cash differentials for gas or barrels loaded from Singapore tend to soften during periods of lower buying from Europe. The East-West exchange futures for soft spread, EFS spread would also become more of a binary indicator open for a clean compliant cargoes and close for section cargoes. For jet fuel, the situation's a bit more nuanced as seasonal travel demand and the occasional East-West arbitrage opportunity will still provide support to cash differentials.

Now, documentation transparency will matter as much as price levels. So overall, sections have turned, but used to be more fluid arbitrage flows into a more punctuated one with intra-weekend and intra-month volatility amplified. Just to illustrate, looking at the refining correct margin, specifically the front-month Asian gas oil swap to Dubai swap derogative crack spread, we're seeing that on average the spreads are shifting by about plus minus 50 cents month to date in Jan, wider by 6 to 7 cents compared to December's prices. The 20-day spread volatility in January month-to-date is also higher than that of December, meaning that the market is experiencing more volatility this month compared to the last.

Jonathan Nonis:

Thanks Rachelle. So my last question for Mei Huey, how is this pushing the market toward longer-term fragmentation and what should we watch out for beyond 2026?

Mei Huey:

What we are seeing at the moment is increasing segmentation for refined products with differentiation by origin documentation, as well as enforcement risk, not just by sulfur content or product specification. Looking ahead, we should watch out for these key points. Firstly, how aggressively will the EU Customs authority challenge origin claims? Secondly, whether there shifts in feedstock by refiners in India or other refineries, taking Russian crude to non-Russian crude is permanent in order to preserve their access to their European products market. And third, whether benchmarks and sales contracts will incorporate compliance clauses effectively formalizing a two-tier market in compliant and non-compliant cargos. In short, the sanctions are a step towards a more fragmented and volatile global middle-district market, which is a reality market participants have to navigate beyond this year.

Jonathan Nonis:

Those who are extremely valuable insights. My thanks to Mei Huey and Rachelle for joining me today. What's clear is that while these are European sanctions, their impact is truly global. The tightening of rules around refined products made from Russian crude has the potential to reshape trade flows, alter regional product balances, and inject further volatility into the Asian gas or the jet fuel market. As always, market will need to stay alert, not just to policy changes, but to how do those policies translate into real barrels moving or failing to move across regions. This podcast is produced by Asia Digital Editor Shikha Singh, based in Deval. Thank you for listening.