With the ban on Russian refined products right around the corner, the “puzzle” of bans to Russian oil and gas imports in the EU is about to be completed. In its latest weekly report, shipbroker Gibson said that “with just two trading weeks left until the EU’s refined products embargo and G7 price cap come into effect, the clean tanker market is softer than many expected. It was largely expected that from midDecember onwards, product tanker freight rates from East of Suez and the US Gulf into Europe would find support from increased fixture activity as traders sought to place barrels into Europe for February delivery. However, with laycans now approaching February load dates, any cargoes which are fixed from the East will not arrive until after the embargo comes into effect”.
According to Gibson, “for January to date, Europe has imported ~1mbd of clean products from Russia, most of which is diesel. Rather than weaning itself of Russian supplies this month, Europe has maximized import volumes, but this begs the question, will there be a hard landing in February? Whilst this, combined with imports from other sources is likely to exceed demand, it still suggests that a sizeable portion of Russian supply needs to be replaced. Thus, increased fixture activity from the East and Americas will likely be required as Russian supply dries up. In the short term, increased stockbuilding may help manage the gap. Europe has done a better job than expected in hoarding diesel ahead of the embargo, whilst a milder winter and softer gas prices have reduced gas to oil switching somewhat”.
The shipbroker added that “refining activity in Europe is also worth watching. Whilst middle distillate margins have been robust since the invasion, gasoline has been persistently weak until December. Now with strong margins across the barrel, European plants should be incentivized to maximize runs, which could also be contributing to narrow EastWest spreads. Provisional data shows European refinery runs hit a post Covid high in December, further boosting regional supplies. Yet runs are expected to fall back during Q1 as maintenance takes hold, which is expected to tighten regional product supply just as Russian barrels are removed from the European market, whilst total European refining throughput is expected to ease marginally year on year. Fundamentally, the region is structurally short and parting ways with its main source of supply, so longer haul imports have to step up. However, potentially derailing this scenario is the ever-present threat of a recession, with the World Bank forecasting zero growth in European GDP in 2023 with more down, than upside risk. Furthermore, the ‘rebranding’ of Russian products in blending hubs such as North Africa and the Middle East could see some Russian cargoes enter the European market via the backdoor, depending on how closely authorities want to scrutinize cargo origin”.
“In the short term, Europe looks adequately positioned to weather the loss of Russian barrels. However, without increased flows into the region, stocks will fall, and East-West pricing differentials are likely to widen, particularly when spring refining maintenance programs commence. Ultimately, this points towards an increase in tonne mile demand and upwards pressure on freight rates. However, with spot flows dictated by arbitrage economics, rates will be constrained by pricing differentials between Europe and export hubs in the East and Americas. Volatility is expected to remain a key feature of the market as trading opportunities open and close”, Gibson concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide