MNI Commodity Weekly: Europe Braces for Life Without Russian Diesel

Executive Summary:

• EU’s Russian Oil Product Ban Set to Reshuffle Global Flows: Europe faces the upheaval of its ban on Russian oil products at the end of the week. Initial stockpiling will alleviate immediate concerns, while a redirection of Middle Eastern and US flows is hoped as a longer-term solution.
• OPEC Underproduction Rolls Over Into 2023: The group’s underproduction, uncertainty around Chinese oil demand recovery and Russian crude oil supply have signalled it will keep its output levels stable during OPEC’s JMMC meeting Feb 1.
• Oil Market: Oil market switches focus from the potential China recovery to current weak demand and economic growth concerns.
• Gas Market: Gas markets are showing signs of support with cooler weather in Europe and signals of progress towards a restart of Freeport LNG in the US.

EU’s Russian Oil Product Ban Set to Reshuffle Global Flows:

The European Union is set to enforce its ban on Russian oil product imports from February 5 – a move set to see large changes in global refined product flows. Questions remain over the short-term impact of the ban after Europe boosted refined product inflows – mainly diesel - over Q3/Q4 last year to stock up on Russian product.

• The EU pushed back the oil product ban to February 5 versus December 5 for crude because of the perceived difficulty in finding suitable volumes from alternative suppliers, particularly for diesel which Europe relies on for around half of its supply.
• Looking at the crude ban to gain ideas of how flows will be impacted, Russian crude exports were initially hit before Asian demand saw them flood back onto the market. India has become the biggest importer of Russian oil globally, taking between 1.2-1.3mbd over the last two months – a record pace. As the Chinese economy has recovered, they have also stepped-up buying activity in January for Russian crude, pulling in around 1.1mbd.
• A theme that has emerged as part of the oil ban is that vessel journeys are now much longer, meaning greater vessel capacity is required. Ships travelling from the Baltic to Asia take far longer than when the flows landed in Northwest Europe and the Mediterranean.
• In a similar fashion to the crude markets, new market entrants are purchasing clean product tanker capacity with a view to moving Russian volumes that western vessels and insurance will no longer carry.
• Vessel tracking shows Morocco and other North African buyers already pulling in some of the Russian diesel market but around 600kbd still needs to be rerouted away from European buyers, with another 200kbd of other clean products to be added on top.
• As Russian refined products head to places like North Africa and Asia, their traditional suppliers such as the Middle East will likely begin sending the replaced volumes towards Europe. The freeing up of Middle Eastern supplies will be key to Europe making the move away from Russian barrels. The US Gulf will form another vital source of diesel for Europe, though high maintenance levels set for Q1/Q2 this year will limit availability in the short term.
• Another trend to watch for is larger vessels being used to move Russian product, as well as an emergence of ship-to-ship transfers - like seen for crude off Ceuta and Kalamata in recent months.
• Russian diesel margins are still anticipated to be strong despite discounts, helping Russian suppliers to shoulder weak naphtha and fuel oil margins which are likely to be harder to find new markets for versus diesel.

source: Vortexa

OPEC Underproduction Rolls Over Into 2023:

OPEC is said to be awaiting the full impact of sanctions on Russian oil exports to assess what to do with production levels, while China’s re-opening of its economy remains the other key factor for global oil demand. OPEC production targets have lagged output levels throughout last year, even after the group introduced the 2mbpd supply quota cut in November. OPEC’s advisory committee JMMC is meeting today 1pm GMT during which the group is expected to keep oil production levels unchanged.

• Latest January output data suggest the group continued to miss its supply quota levels going into 2023. OPEC production is estimated to have fallen to 28.87mbpd in January, down by 50kbpd from December levels as Iraq’s exports fell to a multi-month lows and Nigerian output remained stagnant, the latest Reuters survey showed.
• OPEC oil output averaged 28.97mbpd in December, 91kbpd higher month on month, according to the OPEC MOMR report.
• OPEC+ production targets are at 41,856mbpd since November, after the group introduced the 2mbpd production quota cut. OPEC output lags production targets by around 1.80mbpd in December due to technical difficulties and a lack of investment, narrowing the gap to quota targets from prior months.
• An increase in Nigerian output was the main driver of the increase in December. Nigeria boosted oil production to 1.6mbpd in December, up from 1.41mbpd in November and 1.23mbpd in October. Nigeria struggled to meet its 1.74mbpd quota last year after production steadily declined since early 2020 because of pipeline theft which led to wells shutting down and disrupted investment in the sector.
• Angola has also been failing to meet its quota as a result of under investment and disruptions. The country’s crude oil production was around 1.134mbpd, compared to its quota of 1.455mbpd according to the OPRC MOMR report.
• Iraq’s crude oil production has been in line with its OPEC+ agreement at 4.43mbpd of crude in December and November. Latest data from Iraq’s oil ministry and Bloomberg suggest the country’s oil exports fell to their lowest since last March in January.
• Kazakhstan’s output was slightly above its target in the last two months of 2022 at 1.64mbpd, compared with its target of 1.628mbpd, after eight months of below-target flows amid maintenance at the Kashagan field and CPC mooring points.

source: Bloomberg

Oil Market:

The oil market has switched focus this week from potential demand recovery back to global economic concerns. A recovery in Chinese oil demand is widely expected later this year but the timing and degree are uncertain. WTI was down approximately 4% from a peak of around 82.3$/bbl last week to trade back near the levels seen at the end of December.

• Forward curve backwardation has softened slightly in line with the trend from the wider crude market. The front spreads are seeing a little more support than longer dated spreads with uncertainty over Russian oil product supplies from next week. Russian crude exports have recovered in recent weeks despite current sanctions due to increased demand from China and India.
• US refining margins reached their lowest in about three weeks with the 321 crack down to 34.93$/bbl on 31 Jan. Weak demand is weighed against tight supplies and high uncertainty over Russian oil product output. Seasonal US gasoline inventories were last week reported at their lowest since 2012 with further concern for US production during the upcoming refinery maintenance season.

source: EIA

Gas Market:

The European gas market has coped well with short cold spells so far this winter, but potential extended low temperatures and tighter LNG supply remain upside market risks. Strong LNG supply will be required to be maintain cover against cold weather as well as to restock storage over the coming summer months.

• US LNG netbacks continue to fall as European and Asian prices decline. The spreads still suggest it is more profitable to send US LNG exports to Asia instead of Europe in March although slightly favour flows to Europe over the summer.
• European gas storage levels are well above normal and are likely to result in healthier end of season inventories. The withdrawal rate increased back to near normal levels during the second half of January. Total EU gas storage is at 72.65% according to GIE data from 30 Jan compared to the five-year average of 53%. The European Commission said last year that reserves must be at least 45% on 1 Feb to safeguard the EU’s energy security.
• Front month US Natgas is finding some support above 2.63$/mmbtu having fallen 26% from a high last week and 62% from a high in December. Strong production, healthy storage, moderate demand and curtailed LNG exports have driven prices lower but support comes from slow progress towards Freeport’s LNG restart in Texas. Market expectations are for the facility to restart in February, but full operations will take longer. As of Jan. 31, Freeport LNG had not yet submitted a request to the US Pipeline and Hazardous Materials Safety Administration for permission to resume production.

Oil Market Calendar: