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Wood Mackenzie: Russian refinery economics remain strong despite forthcoming European price cap

The European Commission’s announcement that the EU is proposing a $100/bbl price cap on Russian oil products such as diesel, jet fuel and gasoline, and a $45/bbl cap on discounted products like fuel oil, would not severely impact Russian refiners, according to Wood Mackenzie.  
Speaking at Wood Mackenzie’s London office on January 31, Mark Williams, Research Director of Short-Term Refining & Oil Products, said that the oil products price cap, which is due to come into force on February 5, would have minimal impact on Russian refining crude runs and distillate exports. 
“With Russian Urals trading at $40/bbl on an FOB basis, capping the price at $100/bbl and $45/bbl, respectively, would still see Russian refining margins of $20/bbl–$30/bbl,” Williams said. “At these levels, Russian refining economics are still very strong, so the incentive to refine crude into oil products remains high.” 
Alan Gelder, Vice President of Refining, Chemicals and Oil Markets at Wood Mackenzie, said that the challenge for Russian refiners is finding a pool of new, more distant buyers to replace the distillate barrels currently clearing into Europe. However, he added that with the price cap set at the proposed levels, Russian distillate prices could theoretically discount by a further $200/metric t vs. market benchmarks before eliminating the commercial incentive to operate their refining sector.  

“At these potential discount levels, the economic incentives for key emerging countries to import Russian distillates could outweigh the associated geopolitical and reputation risks and so distillate exports continue to flow,” Gelder added.

Russia has increasingly diversified its distillate exports in recent months, according to Wood Mackenzie's VesselTracker data. However, despite the emergence of new export markets for Russian distillates, the re-distribution of Russian oil product trade from the EU import ban does have a broader market impact. Williams expects Q1 2023 Russian crude runs and diesel exports to be ~800,000 bpd and 200,000 bpd lower than Q4 2022 levels, which will support both global crude and diesel prices through H1 2023.

The next few months are therefore likely to be volatile as global trade flows reshuffle,” Gelder said. “We do not see the price caps having any additional impact on trade flows at the currently proposed levels; however, if flows to new markets continue to develop as pricing discounts widen, there remains an upside risk to both Russian refining crude runs and distillate exports in 2023.” 



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