The prospect of new sanctions on Russia became a reality today after Moscow's recognition of separatist-controlled areas in Ukraine, and while energy sanctions have not yet been announced Europe's oil products markets are braced.
The UK and the EU today imposed sanctions of varying degrees on a variety of Russian banks, entities and individuals, following a US move yesterday that put limited sanctions against the separatist areas. Russia has recognised the self-proclaimed Donetsk People's Republic (DNR) and Luhansk People's Republic (LNR) and their claims to areas of eastern Ukraine still in the hands of Kyiv.
But there has as yet been no decision to impose a far-stronger package of sanctions the US has devised with the EU and other allies, and no-one has put restrictions on Russia's ability to sell its crude and oil products. The only move to punish Russia's energy industry came in the natural gas market today from Germany, whose Chancellor Olaf Scholz halted the certification process for the 55bn m³/yr Nord Stream 2 pipeline.
The extent of today's announced sanctions are unlikely to have a significant effect on Russian oil products trading in Europe, although they could make some firms wary of trading with Russia. In the crude market, buyers of Russian medium sour Urals crude have already begun to seek alternative grades, and Baltic Urals differentials to North Sea Dated hit their lowest in 17 years today, with no takers for a flurry of offers.
European refined products markets will nonetheless be braced for a shock if tougher sanctions measures are taken, given the continent's reliance on Russian imports. The EU imported 116.8mn t of what Eurostat defines as "petroleum oils and oils obtained from bituminous materials, crude" from Russia in the first half of last year, or 27pc share of all imports that fit that description in that time.
The EU's largest importer of Russian oil products in the EU is the Netherlands — which shares the Amsterdam-Rotterdam-Antwerp (ARA) trading hub with Belgium — which bought in around 15.1mn t of Russian oil products last year according to Vortexa. France and Germany are the next two largest importers of Russian oil products with 8.22mn t and 6.9mn t last year respectively. Turkey and the UK make up the top five.
Certain European countries are particularly reliant on Russian crude and products imports — Eurostat says Russia provides 75-100pc of all petroleum oils imports to Bulgaria, Hungary, Slovakia and Finland, and 50-75pc to Lithuania and Poland.
Europe would struggle to replace lost Russian products
If harsher sanctions on Russian oil sales are imposed, Europe would struggle to make up the shortfall in its oil imports from other sources.
Russia accounts for 50-60pc of Europe's 4mn-6mn t/month seaborne imports of diesel and other gasoil, with second- and third-placed Saudi Arabia and India accounting for closer to 10-20pc and 5-15pc respectively. That would mean Europe having to treble its imports from those two countries to make up a Russian supply shortfall.
Europe would also struggle to ramp up its own production of the fuel, given its reliance on Russia for refinery feedstocks crude and vacuum gasoil (VGO). Russia loaded 5.05mn t of VGO for European destinations in 2021, according to Vortexa, and is the only large-scale supplier of VGO to Europe.
Russia is also Europe's largest supplier of residual fuel oil, with Baltic Sea exports accounting for around 41pc — or 9mn t — of all fuel oil delivered to ARA last year, again according to Vortexa.
Any obstruction of Russian naphtha supply to northwest Europe would cause problems for gasoline blenders and petrochemical producers — the Baltic Sea port of Ust-Luga is the single largest source of naphtha to northwest Europe, accounting for around one third, or 500,000 t/month, last year, Vortexa said.
