Will Record-High Diesel Prices Race Even Higher with EU's Partial Ban on Russian Oil?
After much talk, the European Union (EU) agreed to a partial ban on Russian oil. The decision late Monday will cut its Russian oil imports by nearly 90% over the next six months. Overall, the EU relies on Russia for 25% of its oil needs and 40% of its natural gas.
According to European Council Chief Charles Michel, the ban "immediately covers more than two-thirds of oil imports from Russia, cutting a huge source of financing for its war machine."
However, unlike the ban imposed by the U.S., this is not a quick ban. The process will take six months, a timeline that Debnil Chowdhury, vice president and head of America's refining for S&P Global Commodity Insights, explains as one reason crude oil prices didn't jump double digits Tuesday.
"This is going to take quite a bit of time for those sanctions to come into play," Chowdhury explains. "It's not like when the U.S. announced 45 days, it's more like six months, and the market had already factored in that this was going to happen. That's why we didn't see crude prices go up $15 to $20 today. It wasn't a surprise since this has been talked about for the past month."
I just paid 5.71 here in PA — Brian Heher (@BrianBheher) May 31, 2022
Even with the partial ban by the EU, Chowdhury says it's possible diesel prices see a slight reprieve in the coming weeks; however, it won't come in the form of dollars. He says the reprieve will be more like 50 to 60 cents.
"I think the bigger thing, the bigger reason we would see prices fall is because underlying gasoline demand and diesel demand and jet fuel demand eventually get impacted by these higher prices," he says. "So the demand leads to less pull on crude oil. And then that loosens up the crude oil market somewhat. And then we'd have a reduction in underlying crude price that would bring diesel down with it.
"But these prices are not going to go back to the levels we had at the beginning of 2021," he adds. "It's more likely that we'll see maybe $5 to $10 decline in crude price, and that would equate to maybe 50 to 60 cents on the diesel price itself. So we're not talking about a major relief."
Diesel Prices Were Climbing Even Before Russia Invaded Ukraine
Chowdhury points out the rise in diesel prices was happening even before Russia invaded Ukraine. The invasion, combined with sanctions, added more strain to the situation, which is why he doesn't see diesel prices seeing significant declines anytime soon.
The Biden administration was reportedly weighing tapping into diesel reserves to help with tight diesel supplies. However, that wouldn't help the situation much either, considering those reserves are relatively small when you measure the entire scope of diesel demand and needs.
"The release would not help reduce prices materially across the entire U.S. but may provide some small localized relief where the reserve is located in the Northeast," he says. "The U.S. 5-year average inventory for late May has been near 130 million barrels. Currently we are at critically low levels, 107 million barrels. The reserve is only 1 million barrels. Even if the entire reserve was released, total U.S. inventory would remain considerably below average."
