With the embargo on imports of Russian oil by the European Union (EU) to kick in by the year end, the region has to look at other sources, mainly China, said UBS in a report citing an oil industry expert.
Global investment firm UBS had recently hosted a call with Jonathan Leitch, Director of EMEARC (Europe, Middle East, Africa, Russia and Caspian) Consulting at Turner Mason & Company.
The call was to discuss the short and longer-term outlook of the European refining market and focused on recent disruptions on the supply side, impact from the upcoming capacity increase on global oil products’ balances and expected timing of margins’ normalisation, UBS said.
According to Leitch, the loss of Russian imports to the EU could exceed 700kb/d, and other sources are needed to fill the shortfall.
As per the UBS report, Leitch is of the view that the direct impact of sanctions on the EU will be somewhat limited because of blending and redirecting of Russian diesel and fuel oil exports.
This in turn will significantly complicate logistics and should push freight prices higher. There will be additional pressure from the ban on insuring Russian oil cargoes.
Leitch was of the view that the potential price cap on Russian oil is unworkable, said UBS.
On importing oil from Asian countries like India and China, Leitch said the former had recently introduced export limits and tax changes in order to ease domestic pressure of high prices.
However, he expects an impact of less than 100kb/d on diesel export decrease from India in 2H22.
On the other hand, China has high levels of spare capacity.
“While the country’s export quota has been recently increased, the expert does not believe that the country will materially raise exports as environmental concerns and retail fuel price caps discourage companies from increasing capacity utilisation,” UBS report notes.
On the possibility of European refineries increasing diesel output, Leitch was of the view that, while high margins incentivise them to maximise runs, the closures done in recent years as well as underinvestment in the sector are now reflected in crude runs remaining below historical highs.
Leitch expects runs to increase until August, but then there will also be the issue of seasonal maintenance activity.
With higher crude runs year-on-year, additional supply of diesel is seen at about 250kb/d versus last year. Given that loss of Russian imports could exceed 700kb/d, other sources to compensate for the drop are needed.