(The opinions expressed here are those of the author, a

columnist for Reuters.)

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Russia is second-biggest diesel exporter

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US sanctions on Rosneft, Lukoil will lead to changes in

diesel

flows

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New EU measures force Indian refiners to replace Russian

crude

By Ron Bousso

LONDON, Oct 30 (Reuters) - 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.

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