A new wave of Western sanctions on Russia’s oil industry has roiled the diesel market, sending refining margins soaring, but global supplies are unlikely to be severely disrupted for long.
U.S. President Donald Trump last week sanctioned Russia’s two largest oil companies, Rosneft and Lukoil, following a similar move by Britain. These are Trump’s first punitive measures against Moscow over its full-scale invasion of Ukraine in 2022.
Russia is the world’s third-largest exporter of crude oil and the second-biggest diesel exporter, shipping over 800,000 barrels per day of the transport fuel so far this year, around 3% of global demand.
The U.S. measures are exacerbating existing turmoil in the diesel market sparked by the European Union’s adoption earlier this month of a new sanctions package that includes a ban on imports of fuels produced from Russian crude. This ban, which takes effect in January 2026, closes a loophole that primarily benefited refiners in India and Turkey.
In combination, the EU and U.S. sanctions are forcing traders to scramble to find alternative sources of supply, particularly for Europe, the world’s largest diesel-importing region.
As a result, profit margins for processing crude oil into diesel have surged by nearly 20% over the past week to around $29 a barrel, the highest since February 2024, according to LSEG data.
But if recent history is any guide, this price spike is unlikely to last.
REROUTING AND REBRANDING
Rosneft and Lukoil have exported an average of 182,000 bpd and 138,000 bpd of diesel, respectively, so far this year, collectively accounting for 39% of total Russian exports, according to shipping analytics firm Kpler.
Turkey is the largest buyer of Russian diesel, responsible for 36% of its seaborne exports, followed by Brazil at 18%.
While large companies in Turkey, Brazil and other countries may reduce imports of Russian diesel to avoid violating sanctions, many local importers with no exposure to U.S. financial institutions will continue purchasing Russian diesel.
China, which has a well-developed network of traders and tankers to circumvent Western sanctions, will likely absorb some of the excess diesel from Rosneft and Lukoil, which will probably be sold at a significant discount to international prices.
Any remaining Russian diesel will likely make its way into the shadow market where it will be blended with diesel from different sources, or it will simply be rebranded.
In the meantime, refiners around the world are apt to quickly respond to the surge in diesel prices by adjusting operations to maximize diesel output, for example by using different crude feedstocks, further mitigating any supply concerns.
INDIAN REFINING GOES OFF RUSSIAN DIET
The U.S. and EU restrictions will nevertheless have a heavy impact on India, which is the top buyer of Russian seaborne crude as well as a major exporter of diesel to Europe since the bloc stopped importing Russian diesel in 2023.
India has exported 583,000 bpd of diesel so far this year, around 8% of global seaborne volumes, of which 106,000 bpd went to Europe, making India the region’s fourth-largest overseas source of diesel, according to Kpler data. In the face of Western sanctions pressure, Indian refineries have started to rapidly replace Russian Urals crude, which produces high diesel yields.
This should generate stronger demand among refiners for alternative crudes that have similar diesel yields. Such medium-sour grades are produced mostly by Middle Eastern OPEC members Saudi Arabia, the United Arab Emirates, Kuwait and Iraq. They have all sharply increased production this year, offering ample alternatives to Russian crude.
To be sure, the greater competition for medium-sour grades will likely lead to higher diesel prices, but the availability means most refineries will be able to sustain their output levels. For example, Reliance Industries, which operates the world’s biggest refining complex in India’s western Gujarat state, has said it will comply with all western sanctions, yet has no plans to reduce output.
Reliance accounts for three-quarters of India’s diesel exports, meaning that the bulk of Indian sales to Europe should remain steady next year – though they may come with a higher price tag.
However, not all Indian companies can pivot so easily. Another major Indian refiner, Nayara Energy – which accounts for nearly 10% of India’s diesel exports – is 49% owned by Rosneft and relies solely on Russian crude. It is being forced to sharply reduce its output in the wake of the sanctions, sources told Reuters.
Collectively, though, Indian refiners appear to have ramped up exports last month to 748,000 bpd in September, their highest since March 2022, in the immediate aftermath of Russia’s invasion, according to Kpler.
European traders appear to be stocking up on Indian diesel before the EU sanctions kick in next January, more than doubling purchases in September from the previous two months to 317,000 bpd.
They may not need to worry though. Any price spikes in the diesel market are apt to be short-lived, which may be bad news for global refiners but good news for European consumers. Want to receive my column in your inbox every Monday and Thursday, along with additional energy insights and links to trending stories? Sign up for my Power Up newsletter here. Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on LinkedIn and X.
(By Ron Bousso; Editing by Lisa Shumaker)