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Home»Finance»Russia’s Diesel Exports Ban Is Risky for Moscow and World Alike
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Russia’s Diesel Exports Ban Is Risky for Moscow and World Alike

September 23, 2023No Comments8 Mins Read
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(Bloomberg) — With the northern hemisphere winter approaching and global diesel markets already tight, Russia has banned exports of the fuel that’s used for transportation, heating and industrial processes. Many analysts expect the halt to be temporary, but others see it as another example of Moscow weaponizing energy exports, as its invasion of Ukraine enters a 20th month.

Most Read from Bloomberg

Here’s what we know — and what we don’t — about the ban.

The restriction includes all types of diesel, including summer, winter and Arctic blends, as well as heavy distillates including gasoils, according to the government decree. It came into effect on Sept. 21, but doesn’t have a final date.

Russia plays an important role in the global diesel market. So far this year, the nation was the world’s single biggest seaborne exporter of diesel-type fuel, narrowly ahead of the US, according to Vortexa data compiled by Bloomberg. It shipped more than 1 million barrels a day from January to mid-September.

On the face of it, the ban won’t have a big impact on the Western nations that lined up to support Ukraine after Russian troops crossed the border in February 2022. Traditional buyers in Europe stopped buying from Russia following the attack. That’s pushed the trade elsewhere, with Turkey, Brazil and Saudi Arabia emerging as key destinations.

But oil markets are global and the loss of such a large source of supply for a prolonged period of time is almost unthinkable. For its part, Russia probably can’t afford to keep withholding exports for too long either.

Russian barrels sent to Saudi Arabia and Turkey freed up diesel produced in those countries’ own refineries. That’s now being exported to Russia’s former buyers in Europe. It’s not an efficient trade, but it makes sure everybody still gets the fuel they need. Halting Russian supplies to these “friendly” states risks eventually impacting the “unfriendly” ones in the west through higher prices and curtailed exports from countries like Turkey and Saudi Arabia.

READ: Russia Halts Diesel Loadings at Ports Following Export Ban (2)

The weaponization argument leans heavily on the timing of the halt, as summer ends and European consumers start to focus on winter fuel. Gasoil is an important heating fuel in parts of Europe, particularly Germany. Diesel is the primary fuel used in the movement of goods by road, making it vital in supply chains.

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Russia has already played a key role in tightening global diesel markets, slashing its crude exports in tandem with fellow members of the OPEC+ group of oil producers, most notably Saudi Arabia. Those cuts have deprived refiners of crudes that are rich in diesel fuel. Replacements, like the oils produced from the US shale deposits, yield relatively less.

Domestic Pressures

But there are pressing domestic reasons for an export ban, which may hurt Russia’s refining sector before it hits buyers in Europe.

Russia is wrestling with a surge in domestic fuel prices that’s helping to drive inflation, even as President Vladimir Putin ordered the government to curb those increases.

Domestic demand is probably being boosted at the moment by a bumper harvest, which needs to be cut and collected. The war in Ukraine and support for the occupied territories is also boosting consumption. The scale of the extra demand to demand is hard to quantify.

In contrast, supplies of the fuel have been cut by normal seasonal maintenance at Russian refineries. In the first half of this month, daily refinery runs averaged 5.44 million barrels, about 108,000 barrels a day down from the average for most of August, calculations by Bloomberg show.

Despite the official vagueness, there is an understanding in the Russian government that the limitations will be short-lived, according to an official speaking on condition of anonymity. The measure will last only until a new market mechanism is in place to regulate domestic fuel supplies, another official said.

Export Earnings

Russian refiners earn much more from exporting diesel than they do from supplying the domestic market, and high international prices have provided an additional incentive to export. So the government has repeatedly had to find ways of ensuring the local needs are met. The harsh banning of export flows is needed to demonstrate to the industry it needs to be more receptive of the government’s urges and reach a consensus with the cabinet faster, the one of the officials said.

It’s unclear, however, what a compromise could look like. Earlier, the government also mulled prohibitively high export duties and — more favorably for the oil industry – higher downstream subsidies to encourage flows into the domestic market.

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Those subsidies have been putting a strain on government finances and payments to oil refiners in August rose to the highest in more than a year amid a weaker ruble and higher fuel prices, further straining the budget. The subsidies were halved at the start of September.

It’s not the first time that the Russian government has used tough measures to reign in domestic fuel producers. In 2018, the then-Deputy Prime Minister Dmitry Kozak threatened to introduce a high export duty for crude oil and petroleum products if domestic fuel demand wasn’t met.

Back then, a late-night meeting between Kozak and oil executives resulted in a deal that froze domestic retail fuel prices and secured commitment to supply more fuel to buyers at home.

The governmental decree specifies the regulation is temporary. “How long will it be in force? As long as it’s necessary to ensure stability in the market,” the Kremlin spokesman Dmitry Peskov told Russian reporters on Friday, according to Interfax news agency.

Genuine Need?

Russia’s domestic demand for diesel is a big unknown for industry watchers.

Officially, the nation expects to produce over 90 million tons of the fuel this year — equivalent to about 1.9 million barrels a day — and consumes just 40 million tons out of the total, leaving the rest for exports, according to data from Pavel Zavalny, head of the energy committee in Russia’s lower chamber of the parliament.

However, Russia’s war actions in Ukraine create additional demand. The fuel is needed for military units and consumers in the annexed territories in Ukraine’s eastern region, which have no operating refineries of their own.

Details of the supplies are classified; however, the amount needed for military needs in six Russian regions bordering Ukraine, as well as the annexed Donetsk and Luhansk regions, reached about 220,000 tons in September 2022 alone, according to data seen by Bloomberg.

Even with the military requirements, Russia’s diesel production may far exceed the domestic requirements, putting pressure on the nation’s storage reservoirs. Russia doesn’t disclose information about exactly how much diesel it can hold in its ports, refinery facilities and reservoirs near trunk pipelines.

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As of Sept. 18, the total diesel volumes stored in the facilities reached 2.96 million tons — about 22 million barrels —, according to industry data seen by Bloomberg. The storage peak of 3.73 million tons was reached in February 2023, indicating that the facilities may be able to hold at least 770,000 tons more. That’s about three days’ worth of production during the first 13 days of September.

How Long?

It may not be possible to maintain the export ban for long before Russia runs into capacity constraints.

Extending the measure beyond early October would damage the nation’s oil industry, a person familiar with the situation said. Russian refineries would need to cut their runs to avoid overstocking as free storage space would run out. That makes an ending of the ban in early October plausible, the person said.

Curtailing all exports would result in domestic supplies building up fast, but there’s little sign that that amount of extra fuel would be needed for long and there is limited room to store an excess.

Russia’s ban on diesel and gasoline exports can’t last for long, according to industry consultant FGE. Failing to restart exports “would force refinery shutdowns and have the exact effect Moscow is trying to counter – higher pump prices and domestic fuel shortages,” the firm noted.

A prolonged export ban on diesel and gasoline would not be in Russia’s interest, according to Citigroup Inc. analysts including Francesco Martoccia as it could force refineries to trim operations, leading to lower crude production during winter.

Russia’s domestic diesel demand for the harvest is set to peak in next tree-to-five weeks, before slowing in November and then plummeting in December, the Citigroup analysts noted. That would likely put a six-week upper limit on the curbs.

Nevertheless, the export ban may “reduce some of the complacency that had crept into the market about a Russian disruption threat,” RBC analysts including Helima Croft and Christopher Louney said in a note.

–With assistance from Prejula Prem, Jack Wittels and Alex Longley.

Most Read from Bloomberg Businessweek

©2023 Bloomberg L.P.

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