Following Russia’s plan to temporarily cease shipments, the price of diesel is expected to soar higher. Diesel prices in Nigeria rose over N1,100 per litre last week, increasing corporate energy costs.
As manufacturers contend with other macroeconomic concerns, this spike has increased their manufacturing costs.
Rising energy costs are a concern to Nigeria’s development potential, experts told MarketForces Africa. The private sector is already dealing with increasing headline inflation, which has caused a widespread increase in production costs across the economy.
Middle distillate markets gained a lift last week when Russia imposed a temporary embargo on diesel and gasoline shipments. This comes at a moment when there is already plenty of concern around middle distillate availability.
Russia put a temporary restriction on the export of diesel and gasoline in order to relieve pressure on domestic fuel prices. The prohibition goes into force on September 21 and has no set termination date.
Even before the news, ING’s Head of Commodities Strategy Warren Patterson stated that Russian diesel exports had been under pressure through September owing to local refinery maintenance and government measures to enhance domestic supplies.
The effect on the middle distillate market has been significant: On the day of the announcement, ICE gasoil finished 4.51% higher, while the November gasoil crack rose beyond $37/bbl at one point, and the prompt gasoil time spread saw its backwardation extend to more than $35/tonne, highlighting the tightness in the middle distillate market.
Russia is a crucial supplier of refined products to global markets, with it exporting in the region of 1MMbbls/d of diesel, according to ING. In fact, Russia is the second-largest exporter of diesel, with just the US exporting larger volumes.
Analysts said the export ban is less concerning for the gasoline market, with Russian exports of gasoline and gasoline components averaging around 145Mbbls/d so far in 2023, a loss that the global market should be able to absorb more easily.
How severe of an impact the loss of Russian diesel has on the global market will really depend on how long the export ban is in place, ING commodity strategist said in the note.
“Although given the likely domestic stock build we will see as a result of the ban, we would not expect it to be prolonged”.
Ban only adds to an already-tight middle distillate market, analysts said. The middle distillate market was already seeing significant strength ahead of this ban with inventories tight in the US, Europe and Asia as we head into the Northern Hemisphere winter.
There were a number of factors behind this tightness, including OPEC+ supply cuts, recovering air travel, limited refining capacity growth, and in Europe, the struggle of being able to fully replace Russian middle distillates after the EU ban came into effect in February.
The loss of around 1MMbbls/d of Russian diesel in the global market will be felt and only reinforces the supportive view we have held on middle distillate cracks and as a result on refinery margins.