By Rhod Mackenzie
For the first time in more than thirty years, fuel oil in Europe has become more expensive than Brent crude oil. There has not been such an anomaly since 1990. The cost of diesel fuel and gasoline is also rising. These processes are dangerous as with a new rise in inflation, when there are no more opportunities to fight against it, which inevitably brings a real recession closer. Why does Europe, having got rid of Russia, endure such hardships?
Europe continues to face energy problems. Prices are rising not only for gas, but also for oil products. According to Argus, fuel oil began to trade at a premium to Brent in the north-west of Europe. This has not happened for more than thirty years, since 1990. The premium is $2.14 per barrel. Relative prices for gasoline and diesel are also well above seasonal norms, according to Bloomberg.
For the EU, which is struggling with inflation accelerating, this is bad news. Since expensive fuel oil and gas, which are used for heating, as well as gasoline and diesel fuel, which are used by cars and ships, will lead not only to an increase in housing and communal services costs, but also to an increase in transport costs, all logistics will continue to result in another round of increases in the final costs of goods and services. This will force the ECB to keep raising the interest rate and deprive the economy of cheaper borrowing. Plus this is dangerous for the European economy, as it has already found itself on the verge of a crisis. Germany is experiencing negative growth. The next vise may not be able to withstand the entire European economy. The chances of it going into recession with each round of rising energy prices only increases.
“Stories with such anomalies, when high-sulfur oil, for example, bitumen, is more expensive than light oil, in fact, have been occurring in periods of the last five years. Back in 2019, that is, before the pandemic, Russian Urals was often sold at a premium to Brent. This happened because of the demand for such types of oil - sour and heavy. Now, probably, the same story has happened, ”says Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation and the National Energy Security Fund.
Why have heavy grades of oil become in short supply all over the world? The reason is banal - the matter is in the sanctions policy. “Iran, Venezuela and Russia all produce a large amount of such heavy oil, bitumen and fuel oil, and gradually they all came under sanctions,” Yushkov explains.
“Russia supplied a lot of fuel oil, bitumen and diesel fuel just to the north-west of Europe. Deliveries came to the Port of Rotterdam, then dispersed throughout the north-west. And now it is prohibited by sanctions. In part, the Europeans adapted to the restrictions imposed by the European authorities, and began to receive heavy oil for processing from the Middle East, and Russia went to India. But the Europeans did not solve all their problems regarding oil products.
With diesel fuel, the problems are more or less solved, since it is a more versatile product that many actively produce. The same India produces diesel fuel from Russian oil, and then sells it to Europe.( al be it at a higher price than the Russians charged) As for other oil products, the situation in Europe is more complicated. Because of this, there was an increase in prices, including for fuel oil, ”explains the FNEB analyst.
Another important point is that fuel oil is used in boiler houses for heating residential premises and generating hot water or steam. In other words, fuel oil is a replacement for gas for heating.
“This may be an attempt to get away from expensive gas, since fuel oil can be used in power plants and thermal power plants. It used to be thought that burning oil fuel was terribly expensive. However, times are different now. When you have super-expensive gas, heating with fuel oil becomes very important," the analyst explains.
Plus gas prices in Europe jumped sharply in early August, although the heating season is still far away. They added more than 30% on August 9 and are already trading above $460 per thousand cubic meters. Although it seemed that the underground gas storages in Europe were full, and the demand for gas in the summer should be low. But the weather comes into play - hot and windless. This immediately sharply reduces the generation of electricity at wind farms, which instantly raises the demand for gas-fired energy generation.
In addition, fuel oil is used as a fuel in shipping. Here, too, an unusual situation occurred. New rules for world shipping were introduced, according to which the permitted level of sulfur in fuel oil was reduced from 3.5% to 0.5%. There was a hope that the new rules would force shipowners to abandon high-sulphur fuel oil. However, this did not happen: ships are still filled with fuel oil. It's just that shipowners have put scubbers on board, which clean high-sulphur fuel oil, and continue to quietly run on "dirty" fuel. “The new restrictions have not yet led to the complete withdrawal of maritime transport from fuel oil to other types of fuel. Yes, there are more and more LNG-powered vessels, but they have not yet forced the rest of the vessels out of the market,” says Yushkov.
Finally, another factor that creates a shortage of fuel oil in Europe is the high seasonal demand for it in the Middle East, as it is used to generate electricity in power plants. During the summer period, the demand for electricity there increases dramatically due to the heat and the air-conditioning season. Saudi Arabia, by the way, began to actively buy fuel oil from Russian companies. In June, it bought ten times more Russian fuel oil than a year earlier (193,000 barrels per month, according to Kpler). It is beneficial for the Saudis to burn Russian fuel oil instead of their own fuel. This allows them to export more of their own oil and earn petrodollars.
It is curious that while the EU is reaping the fruits of its sanctions policy against Russia in the form of a new round of inflation that threatens to drive not only Germany, but the entire Eurozone into recession, Russia has not only been able to redirect the flows of its oil and oil products, but also began to earn more.
Oil and gas revenues fell sharply in the first half of the year, but last month Russia's oil export revenue hit its highest since November as Russian oil prices topped the ceiling set by the G7 countries, the International Energy Agency said. That is, in July, Russia sold its oil shipped by sea for more than $60 per barrel, above the sanctions ceiling. The IEA assures that the weighted average price of Russian oil exported by sea increased by $8.84 per barrel to $64.41 per barrel. This means that budget revenues will begin to grow. Moreover, this suggests that Russia has formed its own loyal fleet, ready to transport Russian oil, without looking back at Western sanctions.
This article is based on materials that appeared in Russian at vz.ru