ULSD Surges to 10-Week High on Fear of Russian Diesel Supplies

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange settled mostly higher on Monday, with gains led by the front-month ULSD contract on expectations that there will be a lower diesel supply available on the global market as traders position ahead of a new round of sanctions on Russian product exports.

On Feb. 5, Russia will face a fresh wave of trade sanctions that will ban all exports of gasoline and distillate fuels into the European Union, accompanied by a G7 price cap designed to keep volumes flowing to non-European destinations, while restricting revenues for the Kremlin. While aggregate volumes of sanctioned Russian crude flowing to the global market remained on par with 2022 levels, the expansion of sanctions to Russian products shipment could be deeper.

European Union is a major consumer of Russian diesel, importing on average 1.7 million barrels per day (bpd) of middle distillates. At the start of 2023, Europe continued to source more than 25% of its diesel imports from Russia, according to tanker-tracking data. Finding a replacement for those volumes would be a serious challenge even for the most optimistic of forecasts.

On the other hand, diesel exports out of Russia could go "underground," a similar trend observed in crude trade. According to market intelligence, an increased number of tankers carrying Russian crude are not transparent about their final destinations. For instance, in the four weeks ended Jan. 20, vessels carrying more than 30 million barrels (bbl) of Russian crude, the equivalent of 1.08 million bbl of daily exports, left ports, showing no clear final destination.

On the demand side, China's abrupt exit from zero-COVID policies could boost global oil demand in the second half of the year, lifting aggregate consumption to a new record high of 101.7 million bpd. The International Energy Agency forecast last week that nearly half of all demand gains this year would come from China.

Daily oil consumption in China, which contracted last year, will climb by 800,000 bpd in 2023, according to a median estimate of 11 China-focused consultants surveyed by Bloomberg News. That would take consumption to an all-time high of about 16 million bpd, the survey showed.

Industry data showed that China's crude imports rose significantly in December, and shipments in the final quarter of last year came in almost a fifth higher than in the preceding three months. At the same time, Chinese buyers have tapped markets in North America, West Africa, the North Sea, and the Mediterranean looking for oil for arrival in March and April.

At settlement, West Texas Intermediate for March delivery was little changed at $81.62 per bbl, and Brent March futures on ICE gained $0.56 to $88.19 per bbl. NYMEX RBOB February contract advanced to $2.6965 per gallon, up $0.0511 on the session, and front-month ULSD futures jumped $0.0841 to $3.5509 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges