Russia puts squeeze on oil market with diesel export ban

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Russia has barred the export of diesel and petrol as crude oil prices rise towards $100 a barrel, marking a significant escalation that will raise fears Moscow is weaponising oil supplies in retaliation for western sanctions.

Diesel prices in Europe jumped after the announcement on Thursday, rising almost 5 per cent to above $1,010 a tonne. Crude oil prices also reversed earlier losses, with Brent — the international benchmark — rising 1 per cent to $94 a barrel.

Russia is one of the world’s largest suppliers of diesel and a leading producer of crude. Its crude exports have already been trimmed under a deal with Saudi Arabia and the wider Opec+ group, which has contributed to a 30 per cent jump in oil prices since June.

Market participants are concerned that Russia is moving to tighten oil supply at a time when central banks are struggling to get inflation under control, and with crude prices potentially poised to break above $100 a barrel for the first time in 13 months.

“Russia wants to inflict pain on Europe and the US and it looks like they’re now repeating the playbook from gas in the oil market ahead of the winter months — they’re showing that they’re not finished using their power over energy markets,” said Henning Gloystein at Eurasia Group.

The Kremlin said the ban was “temporary” and designed to address rising energy prices in Russia, but gave no timeframe for when the measures would end and carved out only limited exceptions such as its own overseas military bases. But the timing will raise suspicions in western capitals that President Vladimir Putin is again leveraging Russia’s power over energy markets.

Russia’s increased use of natural gas supply cuts to Europe after its full-scale invasion of Ukraine last year helped to trigger a global energy crisis, stoking inflation and harming industries and consumers around the world.

“Russia said last year the supply cuts in gas were only temporary but continually tightened the noose,” Gloystein said. “With winter approaching, targeting diesel could easily propel oil back above $100 a barrel, with all the uncomfortable ramifications that brings for the world economy.”

Diesel is the workhorse fuel of the global economy, playing a crucial role in freight, shipping and aviation. Derivatives of diesel such as heating oil are particularly susceptible to winter price surges. Germany and the north-east of the US are both heavily reliant on the fuel for heating homes.

Refined fuel markets are already relatively tight because of rising demand and refinery maintenance over the summer, with pump prices becoming a growing issue for US President Joe Biden and other leaders.

Republican candidates for next year’s presidential election have attacked the Biden administration over rising fuel prices, with frontrunner Donald Trump accusing them of neglecting the domestic oil industry.

Trump has indicated he will force Ukraine to negotiate with Russia if he becomes president for a second time, raising questions over whether Putin may try to influence next year’s election.

Helima Croft at RBC Capital Markets said that, while Moscow may have some short-term domestic supply issues, cutting exports pointed to a desire “to demonstrate the Kremlin’s willingness to weaponise oil supplies”.

“Russia still wants to cause chaos, they still want to break the west’s resolve to support Ukraine. [Putin’s] goal seems to be to make it to next year and see the impact on the US presidential election.”

The International Energy Agency last year said Russian refiners produced “roughly double the diesel needed to satisfy domestic demand, and typically export half their annual production”.

Russia is the world’s second-largest seaborne exporter of diesel after the US, according to Kpler, a freight data analytics company, and before its invasion of Ukraine was the single biggest diesel exporter to the EU.

The EU and US have largely banned imports of Russian refined fuel since February, forcing Moscow to reroute its sales to Turkey and countries in north Africa and Latin America.

The G7 advanced economies have also tried to impose a price cap on Russian oil sales, while western countries have increased diesel imports from India and the Middle East.

But Russian refined fuel sales, particularly diesel, remain a critical part of oil supplies. In August Russia exported more than 30mn barrels of diesel and gas-oil — a diesel proxy — by sea, according to Kpler.

Russia is a smaller exporter of petrol, exporting only 90,000 seaborne barrels a day in August, Kpler added.