Russian diesel discount offers big margins in two-tier European trade

By Ron Bousso and Rowena Edwards

LONDON (Reuters) - Russian diesel is trading at a steep discount to the fuel produced by other countries, traders said, creating a potentially lucrative two-tier market window for some ahead of a possible EU oil embargo on Moscow.

Although large firms including Shell (LON:RDSa), BP (NYSE:BP) and TotalEnergies have already announced they have stopped buying cargoes of crude oil and refined products of Russian origin, others continue to trade Russian oil, traders said and documents show.

The European Union is heavily reliant on Russian diesel, which Refinitiv data shows accounts for roughly half of its total imports in May, and has yet to agree on an embargo on Russian oil as some of its member states oppose such a move.

And although trading Russian diesel is not currently in breach of any EU sanctions, the window for doing so may be closing regardless of any oil embargo, with some firms saying they plan to cut purchases of Russian oil products from May 15.

This is as they seek to comply with language in existing EU sanctions intended to limit Russia's access to the international financial system following Moscow's invasion of Ukraine on Feb. 24, sources told Reuters last month.

Russian diesel, which has been sold in recent weeks into Britain, France and the Netherlands among other destinations, has been traded at discounts of around $30 a tonne to the non-Russian fuel, five traders and brokers told Reuters.

That could result in a profit margin of more than $1 million on a standard cargo of diesel compared with a similar cargo of non-Russian diesel, Reuters calculations indicate.

One bid on the Platts trading platform for a cargo of non-Russian diesel for delivery into the French port of Le Havre was at $42 a tonne above the June ICE (NYSE:ICE) diesel contract, broker reports summarizing end-of-day trading showed.

And in a clear indication of the price difference, the reports show there was an offer to sell a diesel cargo from unspecified origin for delivery into the German port of Hamburg at a premium of $23 a tonne above the June diesel contract, which is the benchmark in Europe.

However, diesel flows from Russia into Europe have slowed markedly in recent days, with most cargoes going into the Amsterdam-Rotterdam-Antwerp refining and storage hub, one trader said, adding that the Russian diesel flows were "very opaque".

The margin for refining crude oil into diesel in Europe shot to a record high of around $90 a barrel earlier this year and is currently at $50 a barrel as traders shy away from Russian diesel on which Europe heavily relies.

(Graphic: European diesel on fire, https://graphics.reuters.com/EUROPE-DIESEL/byvrjnydbve/chart.png)

The diesel market divergence reflects a similar development in the crude market, where Russian Urals oil is traded at record discounts to other grades, Jonathan Leitch, director of regional consulting at law firm Turner, Mason & Co, said.

"It's not a quality discount anymore. It's a usability or saleability discount. And it's the same with Russian products," Leitch said.

And although trading Russian oil is not in breach of sanctions, it not without its risks.

Tankers carrying Russian oil and gas have in recent weeks been prevented from discharging in British and European ports by the authorities or port workers.

Leitch said banks may also refuse to underwrite the purchase of Russian diesel.

(Graphic: Diesel differentials, https://graphics.reuters.com/EUROPE-DIESEL/egpbkedwgvq/chart.png)