U.S. Might Do More Heavy Lifting for Europe With Refined Products

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--The European ban on Russian diesel and other refined petroleum products might not have much of a price impact, though it could increase the pressure on the U.S. refining sector.

Members of the European Union on Sunday opted to impose a $100-per-barrel cap on Russian diesel, gasoline and jet fuel. That followed a December cap on Russian crude oil at $60 per barrel. Both measures set a ceiling for the price at which insurance companies and shippers can handle Russian products.

The import-dependent economy in Europe has been able to readjust its dependencies so that it no longer relies on Russian crude oil and natural gas. While some landlocked countries continue to draw on piped products, the regional market has been able to cope with help from the likes of the United States, which is expected to break a record in terms of crude oil production this year.

The first year of the COVID-19 pandemic in the West, 2020, saw the United States take the lead in terms of export revenue, taking in some $58 billion in refined petroleum product sales. As with crude oil, much of that stayed in North America -- exports to Mexico were valued at nearly $17 billion.

Up until now, Latin America was the prime destination for refined petroleum products from the United States, but that could change if Russian products are discounted enough to incentivize a change in flows.

That means more U.S. products in theory could show up on European shores. But the readjustment period could be volatile. We saw that last year when U.S. product exports spiked a few months after the war began.

For the week-ending April 8, 2022, the United States exported around 6.8 million barrels per day (BBL/d) of refined petroleum products, breaking the previous record by 400,000 BBL/d.

At the time, the market was already tight and industry insiders suspected the supply-side outlook was unlikely to improve.

"The shortfall of diesel is not going to go away," a ship broker told Energy Intelligence at the time.

Some eight months after record-setting exports, U.S. deliveries are back to the usual level of around 4 million BBL/d. And destinations have yet to shift much either, though some products were showing up in the Dutch market as recently as November.

The cap, meanwhile, was not designed to limit supplies so much as it's meant to keep money from going into the Kremlin's war chest. That means refined products from Russia can continue to flow, though it will have a tough time expanding its market share.

Analysis from Swiss investment bank UBS said a lack of available tankers will limit what Russia can do under the new restrictions. It may try to export more, but analysts said there's only so much that its reliable customers such as China and India can import.

"Looking at data since 2006, China has rarely imported more than 20% of its crude from one country, with both Saudi Arabia and Russia around that level in recent months," analysts explained. "We believe China wants to avoid making Europe's mistake of becoming too dependent of one country, preferring to keep the maximum share of one exporter at 20%, and instead choosing to import from several countries."

That could put even more strain on alternative producers such as the United States, which could eventually catch up to the market. Hobbled by inclement weather in December and stormy weather last month, the dense network of U.S. refineries in PADD-3 are struggling to keep up after running hot for much of 2022.

Overall U.S. refinery capacity is down from year-end levels of around 90% and a busy period of seasonal maintenance will only hamper activity further. In the U.S. market, the amount of distillates, a category that includes diesel, in storage is about 17% below the five-year average for this time of year, suggesting there's not much more the U.S. energy sector can contribute.

But the market has spent months preparing for the latest EU moratorium on Russian products. Diesel prices were actually on the decline after the weekend decision.

While the U.S. role in the latest supply-side development may be limited, after nearly a year of adjustments, the global market seems to have navigated through the war premium relatively unscathed.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).