The EU ban on Russian oil product imports will contribute to keeping refining margins higher in 2023 than historical levels, which is supportive for EU refiners, Fitch Ratings says.
We expect the ban, which came into effect on 5 February, to mainly affect diesel as Russian imports historically covered about 10% of European demand for diesel, according to the International Energy Agency. European offtakers had stockpiled large volumes of diesel in the previous three months, including from Russia and other regions, anticipating this measure, which should cushion the impact in the short term.
However, supply pressures may develop once these stocks are used. Additional volumes that will be brought into Europe to replace Russian imports may have less favourable logistics and therefore higher costs. We therefore expect diesel prices to remain higher in 2023 than before the Russian invasion of Ukraine and the start of the European energy crisis, although we do not expect any shortages in the European diesel market.
Tight supply in the European fuel market should support refining margins, which we also expect to remain higher in 2023 than historical levels, although we expect them to moderate compared to the record highs in 2022. European companies with a high share of refined oil products in their sales mixes, including PKN ORLEN, Tupras, CEPSA and OMV, should benefit the most. Similarly, we expect strong results from the refining segments of integrated oil majors, which will supplement exceptionally high profitability in their upstream segments reported in the recent quarters.
The EU, together with the other G7 countries and Australia, also adopted a price cap mechanism for offering shipping, insurance and other technical and financial services related to sea transportation of Russian oil products to third countries. The mechanism prohibits the offering of such services if the contract price of oil products that originate or are exported from Russia exceeds USD45/bbl for “discount-to-crude” products, such as fuel oil and naphtha, and USD100/bbl for “premium-to-crude” products, such as diesel, kerosene and gasoline.
A similar cap price mechanism for Russian oil imports was introduced in December. The mechanisms are designed to curb Russian oil and petroleum product revenues and should not have a direct impact on European oil and refining companies.
The current diesel price referenced to Brent oil at Amsterdam-Rotterdam-Antwerp, the main European main trading hub, is about USD110/bbl. The significant discount of USD30-40/bbl, at which the Russian oil blend Urals is traded compared to Brent, means Russian diesel prices are currently significantly lower than the price cap agreed.
Source: Fitch Ratings