EU sanctions reshape Europe's refined product flows

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Gary Clark:

Hello and welcome to the Platts Oil Markets Podcast by S&P Global Energy, where today we'll be talking about the impact of the European Union's 18th sanctions package on Russia, which stopped the flow into the EU of refined products processed from Russian crude from January the 21st of this year. I am Gary Clark and I manage the EMEA Clean Refined Products price reporting team based out of London. I'm joined by Aruni Sunil, who reports on European jet fuel markets. Jan Kedzior, who looks at diesel and Rebeka Foley, who is a senior analyst looking at short-term oil analytics on the Serra Energy research team. Welcome all.

Europe is net short both diesel and jet fuel. And since the ban on imports of refined products produced in Russia came into effect in February 2023, has become more dependent on supply from the Middle East and US in addition to Turkey and India who have been big processors of [inaudible 00:01:09] and exporters into Europe of diesel and jet fuel.

While the EU import ban on fuels refined from Russian crude came into effect on January the 21st, the US administration also announced on February the 2nd a reduction on trade tariffs on India from 50% to 18%. After Prime Minister Narendra Modi agreed to halt purchases of Russian oil. So the Russia-Ukraine War and the European and US response via sanctions continues to have an impact on European refined oil product prices amid a myriad of other factors. So starting with you Aruni, India has been a big exporter of jet fuel to Europe. Its early days, but how has the jet fuel market reacted since the EU sanctions package was adopted in July last year and since it came into effect in January of this year?

Aruni Sunil:

Yes, thank you, Gary. The market was divided on how the sanctions on Russian-origin refined products that came into effect Jan 22nd would impact flows and balances. So last year, one half of the market believed that it would lead to significant supply tightness in the European jet market, while the other half said that flows would just reshuffle, but that general balances of the market would remain the same. So far it seems that both these opinions hold true.

The market did tighten quite a bit in December with strong year-end holiday flying demand, low refinery output and lower imports due to strong demand in exporting countries. But that tightness has eased since then. There's enough crude available globally and strong refinery production with jet-cracks regaining strength. So general balances remain the same so far with more flows from the Middle East and the US replacing lost barrels from India and expected to surge further in the coming months.

Gary Clark:

Okay. So you mentioned flows replacing flows from India, right? So I mean we're only a couple of weeks into the sanctions coming effect into the EU. Is India reducing its imports of Russian and crude? Is less Indian jet fuel coming to Europe? Are we seeing that already or...

Aruni Sunil:

Yeah, global jet fuel flows have seen quite a bit of reshuffling over the last two months. We've seen Indian jet moving away from Europe and finding homes elsewhere and Europe is pulling more from the Middle East and the US to replace these lost barrels. And Europe is net short jet fuel and imports. Most of its jet from east of Suez suppliers and India, China and Turkey are the ones which are impacted by the new sanctions. And in 2025, Europe imported 26% of its total imports from these three countries.

The market has been more confident about Turkey's ability to prove segregation given the geographic location of its refineries. Europe received around 70,000 metric ton of jet from Turkey in Jan and 93,000 metric ton in December, which is around the same volumes that we had seen the year before. So we haven't seen any Indian cargoes of jet discharging into Europe except for one into Italy according to market players. And this is since the sanctions took effect on Jan 22nd and Indian exports of jet into Europe have dried up since the week starting 21st December when we saw some cargoes coming into the Mediterranean and since then Indian jet is mostly seen heading to Southeast Asia and parts of Africa.

Gary Clark:

Okay, Aruni. So you mentioned that jet fuel prices has been a shuffling of flows, jet fuel cracks are strong. So how are jet fuel prices at the moment on the set of these new sanctions coming into effect?

Aruni Sunil:

Yeah, there's been price volatility from these changes and Europe is generally experiencing a relatively lower stocks environment with buy fuels taking up more tank space in the Amsterdam, Rotterdam, Antwerp hub and strategic reserve requirements going up as well. And this is making prices more sensitive to supply disruptions and geopolitical shocks. And we have seen elevated jet prices in December and January with the complex tightening on the back of missing Indian flows.

So we saw the CIF Northeast Europe Cargo Differential hit its highest point in two years on January 13th when it was priced at a premium of $88.75 cents per metric ton to ICLS-Geo. Prices were also supported by refineries having maximized diesel production over jet fuel owing to stronger diesel cracks up until then, but now as jet has strengthened, refineries have switched back to producing more jet fuel and differentials have also softened since refineries have come back from maintenance and with stronger imports from the US and Middle East replacing Indian jet flows.

Gary Clark:

Okay, that's very clear on the jet fuel side of things. Moving over to you Jan, what are you observing in European diesel markets right now?

Jan Kedzior:

Yes, I think the story in diesel is to some extent similar to what Aruni said about jet, but it's also a bit different, right? Similar in a sense that those European imports of Indian origin diesel have dried out after the sanctions kicked in towards the end of January and looking at tracking data for example, we saw a lot of those reliance diesel cargoes heading to West Africa, for example, instead of Northwest Europe. We have to remember that most of these large vessels going between India and Europe go around the Cape of Good Hope and hence West Africa is also geographically a convenient location for those cargoes to stop. On top of that, differentials in the offshore Lomé market for diesel have been quite strong for the past few weeks with periodically Lomé pricing above Mediterranean diesel. Again, incentivizing those barrels to go there too and market participants commented that maybe the owners of those cargoes wanted to see how the situation with sanctions will play out, right?

But as the immediate effect, Europe also benefits from that available resupply from the US and it's not uncommon to see those large volumes of US diesel shipped to Europe, especially in December. So we've been seeing those US cargoes arriving, especially in northwest Europe since early December, softening the prompt market and as a result, for example, we've seen diesel barges priced at the discount to [inaudible 00:07:38] futures reflecting that ample supply in the ARA hub. And that meant that even though that Indian diesel stopped flowing to Northwest Europe at least for a few weeks, that was immediately covered by that supply from the US which had been supplying the market even before the sanctions kicked in.

Rebeka Foley:

If I could jump in there, I think it's interesting also to look at these two markets. If you compare diesel and jet in Europe, I think they're also interesting to look at, right? In terms of the fundamentals on the diesel side, on the demand side, this is a market that is in structural decline, right? We have diesel car sales falling every single year. Last year they fell to just 9% of total sales, right? So this is a long-term structural trend. We have diesel demand in decline. Manufacturing is weak in Europe, it's in contraction. It's been improving a little bit last year, but it's still in contraction. So that's something to consider. That is a market in decline. Then if you look at jet, that's a growth market in the short-term, jet demand is going to be weak. We had a big boost in December with air traffic surging in Europe, but that is really coming back down.

So they're kind of interesting to compare there, jet as growth and diesel in decline. And then on the supply side, if you look at gas oil supplies, there's a lot of talk about supply shortages or the potential for supply shortages, but in reality, the market is decently supplied. We have gas oil stocks just below average in the ARA, and jet supplies are really high. So on the distillate inventory side, there's no shortage of supply in Europe. So that is definitely affecting the market. And on the demand picture, it's not that great either in the near term. So the market seems to be pricing in more the potential for supply to be disrupted rather than the reality. And I think that's something to consider in terms of where we're going, because if the fundamentals are actually not that strong, then prices may not stay high forever.

Gary Clark:

I see. So clearly there's different supply and demand factors between diesel and jet fuel, but prices are highly correlated, but we've got quite a balance to weak market at the moment as sanctions are kicking in, I mean, can I ask in terms of crack spreads, is it jet fuel or is it diesel that's winning right now? Rebeka? Jan?

Rebeka Foley:

So at the moment, jet is stronger than diesel and we've seen actually globally jet cracks be really strong, stay really strong despite high global inventories in many different hubs. In the US the same jet cracks have been really, really strong and showed a lot of resilience and that has been supported by really strong global commercial air traffic. As I said, jet is a key driver of global product demand growth. It is a growth market. We've seen resilience in the gasoline market as well, but on diesel, diesel cracks have been a little weaker but also very strong. They've come off in the past day, which sort of suggests that maybe that sort of spike is going to come down. We're going to see some market correction there, but there's also some global dynamics going on.

If you look at the US, we've had really cold temperatures that have been really pulling on heating oil demand in Pad One, which is the demand center for heating oil in the US. And so that will be affecting Pad Three balances as well, which also supplies Europe and Pad Three inventories are high. But we do see that that is supporting cracks in the US and in Europe. So there's really strong support for the distillates, but nonetheless, the fundamentals are not necessarily going to last. There seems to be a lot of uncertainty, as you said about compliance and about the potential for supply to fall, right? And that seems to be where the strength is coming from.

Jan Kedzior:

Yeah, I agree. And I think what we have to remember is that while on one hand those fundamentals remain relatively weak, I would say, especially for Northwest European diesel, it just seems like over the past months we've seen so many events that supported these prices despite sort of weaker fundamentals. So we come back to June 2025 escalation in the Middle East between Israel and Iran pushing prices higher, cracks rising for both diesel and jet. We remember that both products priced from [inaudible 00:11:57] futures, which is a 10 PPM diesel contract delivered physically in the ARA hub. Then we have, in July, some of that, let's say shortage caused by a bit of anxiety in June. Again, very high prices. Then Europe pulls more cargoes. But as we go into November, again, we see US tariffs, we see fresh US sanctions on Russian oil producers. Again, prices going up and then again we come back to December, demand for diesel weakens seasonally.

Those US cargoes start feeding in, softening the market. But then again, we start the new year, we have the situation in Venezuela, which provides a bit of support that was strengthened with Iran, and as you said it, Middle East accounts for around 25% of Northwest European diesel supply. So it is definitely an important supplier when you look at the balances. But at the same time, a lot of the movements that we see, and especially in diesel futures, are sentiment driven according to what we hear from market sources. And the correction, for example, that you mentioned.

I mean on February 2nd, [inaudible 00:13:11] says the [inaudible 00:13:13] contract down nearly $60, right? And in the previous week it gained around $70. So we saw that as the market saw, that this intervention in the Middle East was didn't materialize over the weekend, nearly 90% of that strengthening then eroded in one day, which shows you how detached sometimes we can say those fears and anxieties are from actual fundamentals in Europe.

Gary Clark:

Yeah, I think it's clear that the absence of Russian refined products in Europe has increased that dependency on the Middle East and beyond the Russia-Ukraine sanctions packages. We're seeing other factors. In particular, the relationship between the US and Iran, clearly adding to diesel in addition to jet fuel price volatility, we focused a lot on diesel and jet fuel here. There's other refined products. How's gasoline being impacted by the EU's 18 sanctions package?

Jan Kedzior:

So the impact on light ends in general was much smaller than on middle distillates, right? And light ends, we mean mainly gasoline, but also naphtha and NLPG. With gasoline, there was a little bit of an impact, but we have to remember that those EU sanctions, they target oil products with the CN code 27. Now for gasoline blending components, different components might have different customs codes depending on the aromatics content and overall, Europe is a big exporter of gasoline.

And so the impact on gasoline has been quite small. Russia, for example, is known to export naphtha, but the import volumes have been tiny since the EU banned Russian imports altogether. So, again, even on the naphtha front, there wasn't much of an impact. So to summarize, when we are looking at oil products, clean refined products, it's mainly diesel and jet where we saw the impact.

Gary Clark:

Okay, thank you, Jan. Well, there are clearly many upside and downside factors affecting the prices of European refined products right now and I want to thank Aruni, Jan and Rebeka for shedding some light on these markets. A very action-packed debate. Much appreciated. And before we go, I'm delighted to say that registration for the London Energy Forum 2026 is still open. Two weeks earlier than previous years the Global Energy Community will convene in London to kick off International Energy Week. So do join us on Monday, February the 9th at the Park Plaza Westminster Bridge. As we explore our core theme, expanding energy markets and trade through our Energize agenda, we'll be diving into how we integrate traditional markets with future energies.

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