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Ukraine fallout: Diesel surges more than crude before falling back

Diesel prices kicked off the trading day by rising far faster than any other petroleum prices Thursday morning in reaction to the Russian invasion of Ukraine. 

However, by midmorning EST, the price of diesel had fallen back to be up about the same amount as crude.

At approximately 7:15 a.m. Thursday, the price of ultra low sulfur diesel (ULSD) on the CME commodity exchange had risen about 20% and crossed the $3 per gallon level. If it were to settle at that level, it would be the first settlement above $3 a gallon since June 26, 2014.

At that point, Brent crude, the world benchmark, was up about 8.3%. 

But by 9:50 a.m., things had changed. The price of ULSD on CME was up 5.98%, to just under $3 a gallon. That still marked a gain of almost 14 cents per gallon from the prior day’s settlement. 

But Brent at that hour was up $6.22 per barrel, a gain of 6.42%, to $103.06 a barrel.

The vast difference between the market for the two products is likely a reaction to the enormous role Russia plays in the export of a diesel-like product called gasoil. But as news floated through the market that Russian gasoil exports did not appear to be impacted by the fighting, a move back toward more normal relationships took hold.  

Russian gasoil exports are vital for Europe, whether they are sent via pipeline or by water. Bloomberg recently reported that Russia supplied 9% of all German diesel demand and 15% in Poland. 

“Certainly, Russian plays a critical role in the supply of diesel to Europe,” Francesco Di Salvo, an editorial director with S&P Global Platts, said. 

But Di Salvo added that there are no reports of any disruptions from the two key loading ports for Russian diesel exports, Novorossiysk and Tuapse, both on the Black Sea.

Like all exports coming out of the Black Sea, ships must transit the Bosporus strait that slices through Istanbul. There were reports that Ukraine has asked Turkey, a member of NATO, to halt any Russian ship traffic through the Bosporus. But although the Bosporus at its narrowest point is only about 600 yards, it is considered international waters.

The one tight tie between Russia and Ukraine on the petroleum front — the southern portion of the Druzhba pipeline, which carries crude — was reported by S&P Global Platts to be operating normally.

The other physical link between Russia and Ukraine is the main natural gas pipeline that transits Ukraine, taking gas to western Europe. That was reported Thursday morning as still operating, though flows have been reduced for several months and Moscow has regularly turned the volumes up and down based on the tension level of its relationship with Ukraine. 

The benchmark price of pipeline natural gas in Europe, the Dutch TTF price, was reported to have risen Thursday morning by as much as 50%. Platts had reported prior to the invasion that front-month gas prices on the Dutch TTF hub had already risen 18% from the start of the month, not counting the huge surge Thursday.  

Di Salvo reiterated what oil analysts have noted in recent months: Refineries around the world aren’t running at the normal rates one would expect, particularly with the strong refining margins in place. The high worldwide price of natural gas, which provides the energy needed to run the refinery, and the high price of hydrogen, required in various refining processes, is discouraging refiners from cranking up output, according to Di Salvo. 

Reuters Thursday morning reported a notable development following the invasion — the inability of some traders to open letters of credit with banks in order to buy Russian oil. 

The news agency reported that at least three major buyers have not been able to open letters of credit to secure their purchases of Russian oil, though there are no current sanctions against doing so. If banks continue to hold back, that could mean that Russian exports of oil, be it crude or products, might have difficulty making it on to the market even in the absence of oil-specific sanctions. 

As for the U.S., Russia has begun to rise as a significant supplier to American oil markets in recent years, after many years of being relatively minimal. Between March and November of 2021, the last months for which data is available, U.S. imports of Russian crude ranged from 182,000 barrels per day to 311,000 barrels per day. By contrast, in 2019, the last full year before the pandemic, crude imports topped out at 93,000 barrels per day and were less than 100,000 barrels per day for several months. In 2019, there wasn’t a single month that reached 100,000 barrels per day.

U.S. imports of all non-jet fuel distillate products from Russia are highly volatile. They were higher in the first 11 months of 2021, recording at least some shipments every month. In recent years, a figure of zero often would be recorded.November’s imports of 50,000 barrels per day was the highest since August 2018.

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