A cold winter and supply concerns are supporting prices

Europe’s diesel market has seen a notable price rally after Washington imposed its toughest sanctions on Russia’s oil sector.

Northwestern European diesel futures jumped to their highest spread over crude since July on Monday before easing back slightly, according to fair value data compiled by Bloomberg. Other signs of strength included higher margins in Asia and the United States and a more upbeat pattern in short-term European contracts.

Russia is a major exporter of diesel, and any disruption to flows could tighten global supplies. While the recent price moves are significant and could make refiners more profitable, they are still relatively small compared with the wild swings seen in 2022, the year Russia invaded Ukraine.

Supply Shortage Fears

The rise in diesel prices is the result of the latest round of particularly tough sanctions on Russian ships and refineries, according to Eugene Lindell, head of refined products at consultancy FGE.

Along with rising spreads, diesel futures curves are pointing to growing concerns about a potential shortage in the market. On Monday, the spread between the front-month ICE gasoil futures, a key European contract, reached its highest level since April, excluding expiry days. This pattern is known as a “continuous decline,” a positive sign as fuel for immediate delivery is more expensive.

“The recent strength in ICE gasoil is partly a result of anti-Russian sanctions on ships carrying crude and their impact on Chinese and Indian refineries in particular,” said James Noel-Beswick, an analyst at Sparta. “Sanctions on Russian diesel suppliers, particularly companies like Surgut and Gazprom,” are also significant, he added.

In addition to the recent sanctions, prices are also supported by a cold snap in the United States and Europe, which could increase demand for heating fuel, an important part of the diesel market.