European product markets rattled by price uncertainty

The conflict in Ukraine has disrupted patterns of trade in the European refined oil product markets, presenting challenges to traders and price reporting agencies alike.

Many trading participants are refusing to accept cargoes either originating in Russia, or being sold by any organisation connected with the country. Shell this week bid for diesel cargoes stipulating it would only take "goods… not be of Russian Federation origin and shall not have been loaded in or transported from the Russian Federation." It said it would consider cargoes to be of Russian origin if they are produced in Russia or if 50pc or more of their content by volume consists of material produced there. Shell has offered product in other markets with similar proposed restrictions.

But an absence of specific sanctions against Russian crude and products in Europe mean others remain willing to trade as normal, splitting some of Europe's most important markets into two distinct tiers, one with Russian-origin cargoes allowed and the other without.

As Russian cargoes are pricing at a varying range of discounts to non-Russian cargoes owing to a relative lack of demand, assessing fair market value has become difficult — particularly as spot liquidity in some European markets has thinned out almost entirely because of a lack of clarity on future supplies and value.

The refined product markets most affected by the divergence in Russian/non-Russian cargo values are naphtha, diesel, fuel oil, and vacuum gasoil (VGO), which are particularly reliant on Russian supply. In contrast the European gasoline market has been relatively well-shielded from disruption, by virtue of daily pricing being based on trade in benchmark Eurobob oxy gasoline barges that are mostly produced and traded around the Amsterdam-Rotterdam-Antwerp (ARA) region. A total of 298,500t of Eurobob oxy has changed hands so far in March, broadly in line with the monthly average of around 310,000t for the previous 12 months.

But no diesel cargoes have changed hands on public platforms at all this month, compared with 10 in February. The naphtha trading window was deserted for seven consecutive trading sessions in mid-March, as potential buyers were scared off by the possibility of their bids matching an offer of a cargo originating in Russia. Disruption to naphtha may ease from today, as European benchmark provider S&P Global Platts has taken action to disbar all Russian-origin cargoes from its trading window.

In the fuel oil market, TotalEnergies sought a non-Russian low-sulphur 1pc (LSFO) cargo in the week to 18 March, although it did not receive any offers. Some marine fuel suppliers and shipowners have asked for non-Russian origin products, but supply from elsewhere, particularly of high-sulphur fuel oil (HSFO), is limited.

The VGO market may prove to be the most disrupted. Russia is not only the major supplier of VGO globally, but also the only consistent exporter to Europe, where the Covid-19 pandemic has led to closures at simpler refineries that would typically produce VGO. Any non-Russian VGO assessment would therefore not be underpinned by a great deal of physical supply, which is crucial for the robustness and transparency of pricing assessments. Conversely, reduced production because of refinery cuts and a rapidly-shortening portfolio of buyers present challenges even for printing a Russian-only price in that market.

By Thomas Warner