Oil & Gas News

Russia Eases Diesel Export Ban, Restores Refiner’s Subsidy as Storage Fills

Russia, Diesel, Ban

By: Robert Perkins & Eliza Turner – S&P Global – Russia has largely lifted its ban on diesel exports just two weeks after its surprise move to curb soaring domestic pump prices sparked concerns over refining run cuts due to a lack of storage capacity.

Exports of diesel shipped via pipeline to Russia’s seaports are now allowed, the energy ministry said Oct. 6, on the condition that producers deliver at least half their diesel output to the domestic market.

Mineral RightsDiesel flows via pipeline to Russia’s key oil ports of Primorsk and Novorossiisk make up the majority of the country’s exported volumes of around 1 million b/d, according to tanker tracking data.

The move includes other measures to boost domestic fuel supplies and comes after mounting pressure from local producers and refineries for the two-week-old export ban on diesel to be lifted. Refiners were concerned that storage capacity for winter-grade diesel was running out, forcing likely cuts to crude processing.

Russia announced Sept. 21 a temporary ban on most diesel and gasoline exports, in a bid to soften domestic road fuel prices. The move threatened to remove up to 1 million b/d of seaborne diesel from world markets and smaller gasoline flows of around 150,000 b/d.

At the time, Russia said the ban was temporary but would remain in place until the domestic market was fully stabilized.

Diesel for the domestic market is predominantly shipped by rail cars. Severe rail transport delays were part of the reason domestic fuel prices rocketed this summer, with some delays reportedly ongoing. No changes were made to the existing ban on gasoline exports.

Russia transports diesel by pipeline to three key Western oil terminals at Primorsk, Novorossiisk, and Vysotsk which combined handle 70% of all Russian diesel exports, or some 630,000 b/d in August, according to tanker tracking data from S&P Global Commodities at Sea (CAS).

Russian diesel exports, which had already been falling in recent weeks due in part to higher domestic refinery turnarounds and the diesel-intensive harvest season, averaged a post-war low of 654,000 b/d in September, down 286,000 b/d month on month and from a recent peak of almost 1.2 million b/d in March, according to CAS data. It’s unclear how quickly Russian diesel exports could bounce back following the partial easing of the ban.

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Price reaction

ICE gasoil futures fell by up to 3.7% in London after the announcement, but the November contract regained ground to trade 0.7% higher on the day at $853/mt by 1305 GMT.

When the ban was announced on Sept. 21, gasoil futures initially surged 4.5% on the day to an eight-month high while the November gasoil crack spread rallied above $37/b. But the gains were short-lived, as market watchers speculated Russia would struggle to maintain the ban for more than a few weeks due to a lack of domestic storage for refined products or crude oil.

European diesel prices have slumped this week following local reports that the Russian authorities were discussing an easing of the ban on diesel exports. Platts, part of S&P Global Commodity Insights, assessed ICE low sulfur gasoil in London at $869.75/mt on Oct. 5, down 5.3% on the day and the lowest since July 27.

Inside Russia, domestic diesel prices rose an average of Rb1,000/mt ($10/mt) after the announcement, according to sources. Gasoline recorded only small gains as the ban on its exports remains in place.

Russia, Gasoil, Ban

Refinery subsidy

Russia’s energy ministry also announced measures to boost fuel supplies on the domestic market in order to bring down pump prices.

It set a prohibitively high export duty to counter so-called gray exports bought locally and then exported. Companies that buy subsidized oil products for subsequent resale will pay an additional Rb50,000/mt export duty, the ministry said, adding they won’t be allowed to export finished products disguised as other products. Gray exports were seen as contributing to the shortages that plagued the domestic market this summer.

Another measure aimed at preserving stability in the domestic market includes restoring export subsidies to refiners from Oct. 1.

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Referred to as the “damping mechanism,” the subsidy compensates refineries for the difference between lower domestic prices and higher export values. The government’s decision to halve the compensation from September was seen as one of the triggers of the domestic summer price surges.

The ministry also said obligatory minimum volumes oil companies are required to sell on the exchange floor has been increased to 15% of output for gasoline from 13% and to 12% for diesel from 9.5%.

Domestic diesel prices were expected to recover some of the ground lost since the ban was announced, traders said, although a more substantial surge was deemed unlikely due to the reversal of the damping mechanism compensations and the extra high export duty on gray exports.

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