Upcoming winter may trigger internal disputes regarding energy embargo within EU
    Grabbing more Russian diesel

    ANALYTICS  28 November 2022 - 12:42

    Fuad Shahbazov

    With the global energy crisis surging amid Russia's war in Ukraine, Europe keeps looking for additional sources of fossil fuels to replace Russia as the main supplier. Although official Moscow claims that "the Western sanctions did not hurt," it has desperately kept its place in the world energy market. According to the Economist’s previous report in 2022, Russia has a large and growing export surplus. In 2021, the trade surplus reached 7.5$ of Russia's GDP; in 2022, it is expected to rise to 15% of last year's GDP.

    However, the imposition of Western sanctions in response to the invasion of Ukraine badly hit Russia's energy sector, causing many delays in export and payment processes. As a result, Europe stopped shipments of Russian crude oil, stopped importing Russian natural gas and coal, and will ban all imports of refined oil products from Russia in February 2023. Moreover, the inauguration of Moscow's flagship energy project, the Nordstream-2 pipeline, has been frozen by Germany.

    In this vein, Europe’s sanctions on Russia’s vitally important energy field matter a lot since its ability to fund the war has been helped by high oil and gas prices, given the fact that energy export revenues rose 41% over the past year. The most significant point about the sanctions is that they are blocking Moscow’s access to the hi-tech components that its military sector desperately needs.

    Nevertheless, since the sanctions were imposed, some experts voiced their doubts regarding the effectiveness of that policy as they believed that Europe's anti-Russia policy did not work out well. It was claimed that some European countries are still willing to purchase Russia’s petroleum products, thus increasing Russia’s revenue, not decreasing it. Worse yet, the sanctions are driving up global oil and natural gas prices, causing spikes in inflation worldwide.

    Although energy sanctions are still valid and continue to hit the Russian economy badly, they appeared to bypass Russian diesel exports. Since the war in Ukraine unfolded and energy sanctions were imposed, the European Union (EU) decided to postpone imposing on diesel imports from Russia, which is due to take effect in February 2023.

    Hence, according to open data sources, the EU significantly increase diesel imports from Russia ahead of the upcoming ban on paying more for Russian cargo. Russian diesel loadings headed for the Amsterdam-Rotterdam-Antwerp (ARA) oil refining hub rose to 215,000 barrels per day from November 1 to November 12. This should not come as a surprise since Russia maintains the role of the largest diesel supplier in Europe, though the exports of natural gas and oil dwindled.

    While the mass ban on Russian oil and natural gas caused a huge energy crisis in Europe, the next phase of the ban may be the next focal point of Europe's energy crisis while adding to inflationary pressures. Indeed, the prices for energy consumption and diesel in Europe skyrocketed dramatically as a broad implication of Russia’s intervention in Ukraine. According to International Energy Agency (IEA), diesel prices in October were 70% higher compared to the same time last year.

    The new sanctions in February will prevent European companies from providing insurance, shipping, and other services for Russian oil cargoes, even those with destinations outside Europe. On the other hand, Europe's struggle to stock more diesel prior to February 2023 perfectly suits Russia as it also triples exports of more diesel and more crude oil to Asia - China, India, and Turkey, in addition to before the new round of sanctions becomes functional.

    China and India have been big buyers of Russian crude since the start of the war and, at one point, accounted for 50% of Moscow's crude sales. Blocking those sales via sanctions could put Russia's crude revenue in freefall, severely damaging its economy. As such, Goldman Sachs commodities chief Jeff Currie warned that Europe would see another spike in oil prices this winter, with Brent crude hitting $115 a barrel.

    Although at some point, Europe managed to stabilize its position via diesel imports through the Suez, currently, Europe-Russia's flow of diesel is on the rise again. As of November 2022, Russian diesel continues to make up the most considerable portion of European imports at 44%.

    Hence, with the new ban on Russian diesel, Europe will likely turn to the US and China for winter-specification diesel, given the fact that stocks of diesel in northwest Europe are well below seasonal levels. There is no doubt that Europe could get hit by energy sanctions in the long term, and more EU criticism regarding sanctions policy against Russia may upsurge before Ukraine's total victory on the ground is ensured.


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