Column by Kpler senior oil market analyst Victor Katona on the fundamental causes of the fuel crisis

A two-week confrontation between the government and oil refining companies ended with the decision to increase the fuel damper from October 1, while the authorities, in the face of restrictions on fuel exports, intend to place quotas on its supplies to the domestic market. The export ban, which led to the forced redirection of part of the diesel fuel volumes to the domestic market (it is expected that pipeline supplies of fuel to the European ports of Russia in October will fall by 27% compared to September, to 1.52 million tons), made it possible to resolve the current crisis, but did not eliminate its fundamental reasons.

Firstly, the current version of the damper may soon turn out to be a tactical loss for the authorities. Having agreed to full compensation for the difference between international diesel prices and domestic Russian quotations, the government will henceforth be even more dependent on global trends. With diesel crack spreads in Europe and Asia at $30 a barrel, while gasoline crack spreads have fallen 70-80% to $5-6, middle distillates are still the most valuable product category in global markets .

Any more or less significant supply shock, for example the renovation season in Saudi Arabia in October-November, can widen the gap between international and domestic prices. At the moment, the difference is about $300 per ton, that is, 50% more than before the export ban came into force, which increases the Ministry of Finance’s expenses for paying the damper.

The instrument itself is becoming increasingly complex because it was not originally designed to cover such large gaps between export and domestic prices. It was introduced in 2019, when the price of Brent oil averaged $55 per barrel, while now it is $85–90 per barrel.

Second, restrictions on fuel exports will have negative consequences for at least some refineries. The current modus operandi penalizes refineries that are in close proximity to export terminals.

For example, the Kirishi Refinery, Surgutneftegaz’s only refinery, was launched in 1966, meaning the company is at a competitive disadvantage due to a decision made before its founding. From Kirishi it exports an average of 85% of diesel fuel, taking advantage of its proximity to terminals in Primorsk and Ust-Luga. Henceforth, in order to fulfill the government’s requirement to supply at least half of the volumes to the domestic market, the Kirishi Oil Refinery will have to redirect about 200-250 thousand tons per month within the country, becoming a prisoner of its geographical location.

Thirdly, the constant change in the rules of the game prevents Russian oil and gas from acquiring much-needed stability. At the same time, the main issues of recurring fuel crises are not being resolved. For example, the product balance of refineries has a strong bias towards diesel fuel, while the gasoline balance is quite fragile, despite a number of successful modernization projects.

Considering that the demand for diesel fuel in the context of the “energy transition” will fall faster than for gasoline, it is unclear whether it makes sense to stick to the current configuration of refineries in the European part of the Russian Federation. But increasing gasoline production requires multibillion-dollar investments, years of construction and confidence in payback, which is difficult for oil companies, given the regulatory leapfrog, to achieve.

Victor Katona, senior oil market analyst at Kpler