Europe would struggle to replace lost Russian products

Any US sanctions targeting the energy sector in retaliation for Russian military action against Ukraine - something Moscow denies it is planning - could have a significant impact on European oil products markets. Washington has threatened to impose strong financial sanctions on Russia and - if there is agreement with European allies - to target Russia's oil and gas exports.

Russian supplies account for 50-60pc of Europe's 4mn-6mn t/month seaborne imports of diesel and other gasoil. The next two largest suppliers are Saudi Arabia and India, accounting for 10-20pc and 5-15pc of imports, respectively. In a worst-case scenario, in which a total embargo on Russian exports is imposed, Europe would need to treble its imports from those two countries to make up the shortfall.

Russian ports loaded 5.05mn t of vacuum gasoil (VGO) for European destinations in 2021, according to data from analytics company Vortexa. Russia is currently the only large-scale supplier of VGO to Europe and refiners would probably struggle to replace these supplies, making it difficult for them to cover any diesel shortfall by running hydrocrackers at higher rates.

Saudi Arabia is the world's next-largest exporter of VGO with 1.72mn t loading in 2021, but Saudi supply will tighten as the new 400,000 b/d Jizan refinery brings further secondary units online. Meanwhile, closures of simpler refineries in Europe over the past two years have reduced regional output of the product. European ports loaded less than 1mn t of VGO in 2021, under a fifth of the volume exported in 2019.

Russia is also Europe's largest supplier of residual fuel oil. Around 9mn t - or 41pc - of the fuel oil delivered to the Amsterdam-Rotterdam-Antwerp (ARA) trading and refining hub came from Russian Baltic ports last year, according to Vortexa. It says shipments of high-sulphur fuel oil (HSFO) - much of it Russian in origin - to Asia, Africa, North America and the Middle East were roughly 3mn-3.5mn t of in 2021.

European refiners' ability to produce HSFO could be limited if supplies of Russian Urals crude are disrupted. Tight fuel oil supply could also hamper European refiners' ability to increase diesel output using coker units. Many have been buying increasing volumes of Russian fuel oil to serve as coker feedstock.

Any obstruction of Russian naphtha supply to northwest Europe would cause problems for both gasoline blenders and petrochemical producers. The Baltic port of Ust-Luga is the single largest provider of naphtha for delivery to northwest Europe, accounting for around 500,000 t/month or a third of total naphtha flows into the region in 2021, according to Vortexa.

European refiners could try to compensate for any reduction in Russian product supply by increasing refinery runs. If they had to replace lost diesel supply from Russia themselves, for example, European refineries would have to raise runs by around 10 percentage points taking them to almost 90pc of total 15mn-16mn b/d capacity - the highest utilisation rate this century.

But increasing runs would be difficult if supplies of Russian crude were disrupted. And with continued refinery closures expected in Europe and regular maintenance work limiting throughputs, domestic producers' ability to cover any shortfall may be limited.

By Benedict George