Viewpoint: European marine fuels to feel diesel crunch

European marine fuels markets are set for a shake-up in 2023 when EU sanctions on Russian oil products come into effect, as a likely middle distillate supply crunch is being met with mixed demand signals.

From 5 February all remaining imports of Russian oil products must be halted in the EU — after crude sanctions already took effect on 5 December — as part of the EU's sixth package of sanctions against Russia in response to the country's invasion of Ukraine.

The ban will affect Europe's diesel supply most acutely, with the continent still relying on Russia for as much as 52pc of its diesel imports in November. But it will have a knock-on effect on supply of marine gasoil (MGO) too, with the shortfall likely to push diesel margins up early in the year and incentivise refiners to produce as much road diesel as possible at the expense of other gasoils, such as MGO.

Reduced MGO availabilities are already being recorded in Europe's delivered bunker markets, with some refiners already reported to have issued bunker suppliers with warnings of possible shortages in 2023.

This anticipated drop in supply could be offset by steady availabilities of marine fuel oil grades. High-sulphur fuel oil (HSFO) with 3.5pc sulphur remains well-supplied in Europe and prices have remained broadly dampened in recent months, even though Russia has traditionally constituted the lead exporter of that product to Europe. Russian HSFO supplies to Europe were curtailed in August by EU coal sanctions, because heavy fuel oil is shipped under the same EU customs code. But falling Russian imports have been balanced by increased shipments from Saudi Arabia, Greece and the UAE.

Very-low sulphur fuel oil (VLSFO) supplies are also likely to buoyed into 2023 by strong production in Europe and the Mideast Gulf. The start-up of KPC's new 615,000 b/d Al-Zour refinery will increase global VLSFO supply by as much as 10mn-12mn t/yr, which will either contribute to European stocks or displace European supply on its key arbitrage route to Asia-Pacific.

Supply of marine fuel oils will also depend on European refineries' crude slates, and it remains to be seen how the continent will adjust without Russian Urals crude. Alternative medium-sour grades from the Mideast Gulf or Norway — the second phase of the Johan Sverdrup field started production in December — could support residual fuel oil output, but conversely, in the event of stiff competition for those grades, Europe could move to a lighter sweeter slate, cutting residual fuel yields.

Demand signals

Bunkering demand from containerships could decrease in 2023. The global shipping industry is at the mercy of recessionary pressures — economic slowdowns typically restrict the chartering and movement of goods along international shipping lines. International container trades makes up the fourth largest shipping sector by tonne-miles — a measure of how far freight travels — after tanker, bulk and dry cargoes, with the biggest share trading along the main east-west routes.

But this could be partially offset by stronger demand for other large shipping segments. Sanctions on Russian oil will push Europe to look further afield for supplies, which is already being reflected in sharp rises in clean-tanker freight rates as tonne-miles surge. That is likely to continue into 2023 and support bunker demand from tankers.

Recent statistics from Rotterdam show increased sales across all marine fuel grades in the third quarter of 2022, but economic headwinds could strengthen in coming quarters as energy supply shortages pinch industry and inflation rises.

Demand for MGO could rise comparative to other grades, after the International Maritime Organisation (IMO) announced on 15 December that it will adopt a 0.1pc sulphur Emissions Control Area (ECA) in the Mediterranean from 2024. Shipowners will look to scale up usage of the marine gasoil ahead of then, which in a short-supplied market could support prices for the grade.

By James Marriott and Jonah Sweeney