Diesel prices relative to crude have held fairly steady in recent weeks, but a report by the International Energy Agency has a wary — though not apocalyptic — recap for diesel consumers on how Ukraine’s attacks on Russian refineries might end that stability.
Crude and products markets are up overall in the past month. Brent, the world’s crude benchmark, settled on March 12 at $81.92 a barrel. It has crossed the $90 mark in recent days, primarily fueled by concerns that growing tensions between Israel and other countries, Iran in particular, could result in an escalation of military action that could disrupt production in Iran or elsewhere. While the war in Gaza and Iran-backed missile attacks in the Red Sea have helped lift prices, they have not actually resulted in any reduction in output.
But Ukraine has ramped up recent attacks on refining facilities in Russia, and that has the IEA concerned about price increases in diesel given Russia’s role as a key diesel supplier to world markets.
In its April report released Friday, the international agency made up primarily of nations that are net consumers of oil reviewed the numbers linked to the attacks. Its headline on a section in the report: “Russian refinery outages risk disruption to middle distillate markets.”
The IEA concedes upfront that the attacks have “yet to materially disrupt global middle distillate markets.” Diesel is a distillate, as are jet fuel and heating oil, among other products. But diesel is the largest cut of distillate consumption.
“The potential remains for tighter clean product supplies in the coming months,” the IEA wrote. “International light and middle distillate markets rely on Russian exports of diesel, naphtha and jet fuel.” Naphtha is not a distillate.
The IEA’s estimate is that since the end of January, Ukraine has attacked more than 2 million barrels per day of Russian crude distillation capacity, the basic building block of the refining process. Not all of that is offline, but the IEA said it believes that about 800,000 barrels per day of refining capacity has been “wholly or partially” shut down as a result of the attacks.
Trying to count the refining losses
The full impact of the attacks is hard to quantify, the IEA said. Russian government reporting on the impact of the attacks has been scarce, forcing a reliance on third-party estimates of how much capacity has been taken out. Refineries that are down are shrouded in mystery about what units have been affected and how long they will be offline, according to the IEA.
And maybe the losses can be compensated for, the agency said: “It seems reasonable that the Russian refining system is large enough that some outages could be offset by the deferral of planned maintenance or increased runs elsewhere in the system.”
The IEA’s bottom line is that the first quarter is likely to have seen a loss of 500,000 to 600,000 barrels per day of crude processing on a gross basis, before any offsetting steps are taken into account. “The shutdown of these refineries or units for between 4-8 weeks for repairs could mean a significant loss of diesel and naphtha supplies to international markets,” the agency said.
But the report pivots to throw doubt on those numbers as well. It cites numbers from the data analytics firm Kpler that “so far do not show that Russian diesel exports are falling. Weekly data through mid-March indicate that loadings have been maintained.”
It also cites Russian government data that shows only a 100,000-barrel-per-day drop in diesel output. “This level of output is consistent with crude runs at 5-5.2 mb/d, rather than the 4.6 mb/d that a bottom-up assessment of the refinery outages would indicate,” the report said.
Diesel markets not showing concern
The largest source of skepticism on the impact of any Russian capacity loss comes from the market. As the IEA says, diesel relative to crude has fallen in some key markets — the opposite of what might be expected if the Ukrainian attacks were creating large-scale declines in diesel supplies.
The IEA notes that the spread, or “crack” in industry parlance, between Brent and diesel in northwest Europe was less than $25 a barrel in early April after being at almost $40 a barrel at the start of February.
In Asia, the market for gasoil, similar in characteristics to diesel, is now in contango, the IEA noted. Contango is a market structure in which the price of the commodity is higher for each month along the calendar. June is higher than May, and July is higher than June. Contango is associated with well-supplied markets.
In the U.S., on the CME commodity exchange, the spread of ultra low sulfur diesel over Brent crude was more than 70 cents a gallon several times in March. On Thursday, it was less than 53 cents a gallon, a level it had not hit since late May.
And while U.S. inventories of ultra low sulfur diesel are well below where they were at the start of the year — 124.3 million barrels, according to the Energy Information Administration — the level for the week ended April 5 of 108.7 million barrels was the highest in five weeks.
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