An unprecedented chunk of the global diesel market, the workhorse fuel of the global economy, is just weeks away from being subject to aggressive sanctions.

According to newsnow.co.uk, from Feb. 5, the European Union, the G-7 and its allies will attempt to impose a cap on the price of Russia’s fuel exports the latest punishment for its invasion of Ukraine. That will coincide with an EU prohibition on almost all imports of Russian oil products.

Similar measures are already in place on the country’s crude shipments, but it is the cap and ban on refined fuels and in particular diesel that has some oil-market watchers concerned about the potential for price spikes.

Prior to its invasion of Ukraine, Russia was Europe’s largest external supplier of the fuel and the continent has continued to buy in big volumes right up to the cutoff. As a result, the sanctions are likely to see a great rerouting of global diesel flows aided by Russia’s new crude buyers sending fuel back to Europe. In the short-term, there’s a risk of higher prices.

“The loss of Russian barrels is huge and replacing them will be a huge logistical challenge,” said Keshav Lohiya, founder of consultant Oilytics. “But the market is pricing in less panic as markets and trade flows have proven resilient. This will be a new rerouting of diesel.”

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The European Union will have to replace about 600,000 barrels a day of diesel imports, and Russia will need to find new buyers for those supplies, store the fuel on ships, or cut production at its refineries.

Shipments into the EU from the US and India have already been on the rise as they produce more than they consume, allowing them to export their surfeit. China is also expected to send more of the fuel into its nearby markets, indirectly pushing cargoes from other suppliers toward Europe.

“Product flows from net-long regions will intensify as the continent’s embargo on Russian products takes effect February 5th, which we see compounding a tight diesel situation,” Bernstein analysts including Oswald Clint wrote in a note to clients.

India’s role in supplying Europe is notable because it has become one of the biggest buyers of discounted Russian crude since the war broke out.

A big increase in Indian diesel flows would all-but guarantee that Russian crude was being purchased and refined into diesel in India before being sold back to Europe.

By Vision

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