Europe’s oil tanks are brimming, price decline will reach the gas stations

Oil tanks. Photo: Eero Vabamägi

• Brent crude oil became nearly 9 percent cheaper over the week.
• Russia has lost more than 90 percent of its North European market.
• The price of compressed natural gas CNG has been nearly halved from the record level in summer.

Europe’s refining plants have currently more crude oil than they can process into fuels. The earlier panic over the decline of Russian oil export and the resulting fuel shortage now seems exaggerated to the traders.

Brent crude oil lost nearly nine percent of its price over the week, to USD 87 per barrel. The US dollar has also weakened against the euro, which gives hopes that the prices of motor fuels will continue declining in Estonia’s gas stations as well.

The price of the Russian oil, however, fell to USD 69 per barrel. At the moment when only two weeks have left until the coming in force of the European Union sanctions, Russia has already lost more than 90 percent of its market in the Northern European countries, which used to be the main destinations of tankers leaving the Baltic and Arctic ports of Russia. While 1.2 million barrels per day were supplied to the region in early February, according to Bloomberg, it is currently only 95,000 barrels.

No fear of embargo

According to Tarmo Kärsna, management board member of the energy group Alexela, the cheapening of oil products on world markets has also reached Estonia. “The price drop reached the gas stations on November 17, when fuel prices dropped five cents per liter for diesel fuel and four cents for gasoline,” Kärsna noted and added that the sharpest price drop was for compressed gas. “The drop in the world market price of natural gas has now also reached the price of CNG, which has fallen from the summer record level (five euros) to 2.69 euros per kilogram.”

According to him, high fuel prices and fear of economic recession have started to reduce consumption throughout Europe, which in turn exerts pressure on the price of both crude oil and finished products. “Demand for oil products, especially fuel oil, has been reduced by the drop in the price of natural gas and the warm autumn. The storage tanks of the European oil plants are full of crude oil due to the decrease in demand,” Kärsna explained.

According to him, the oil embargo no longer causes great fear in the markets. “In general, buyers have annual volume contracts with suppliers. Companies and factories have had time since mid-summer to find new partners and sign contracts with them for the next year”

The ban on the import of Russian oil products, which comes into effect in February, primarily affects the trade in diesel fuels. “There is still a lot of speculation regarding the availability and price of diesel fuel, because the European factories also have to supply Ukraine, where many refineries have been destroyed. At the same time, the factories supplying the Estonian market have promised to guarantee the agreed quantities.”

According to Circle K, the probability of a decrease in the price of motor fuels has increased, despite the fact that there may be a shortage of diesel fuel. “Demand for diesel fuel is driven by large-scale industry, where they are trying to find alternatives to gas which has been used so far, and this is mostly diesel fuel or fuel oil,” described Indrek Sassi, head of motor fuel pricing at Circle K Estonia. In addition, diesel fuel price pressure continues in the Nordic countries due to the switch to winter fuel.

According to Sassi, the Russian oil embargo should after all increase the price of energy products in the long run. “At the same time, the continuation of the policy of strict restrictions in China is driving down the price. Some analysts think that the price of a barrel of Brent oil can reach 80 dollars in the short term, but changes in the world market usually reach the Estonian retail price with a week’s delay.”

Neste's marketing and communications manager Risto Sülluste added that the markets will also be affected by the possible imposition of a price ceiling on Russian crude oil by large industrialized countries. "If the price ceiling is set too low, it may mean greater demand and higher prices for non-Russian crude oil," Sülluste said.

China sets the price

According to Mart Raamat, the CEO of the Estonian Oil Association, the main factor lowering the price of oil is the zero-Covid policy in China, which is bringing along the decreasing consumption of the world's largest oil importer: “Allegedly, a few major Chinese oil refiners have already asked Saudi Arabia to reduce its December oil supplies, which sends a message to the markets that the Chinese demand is small.”

According to Raamat, the oil embargo no longer worries the markets. “It is already clear that the Russian oil will reach new customers in Asia to a certain extent while Europe will be able to find alternative supply channels at the same time.”

Looking to the future, Raamat believes that rapidly rising interest rates in Europe and the US will cool the economy and limit the demand for oil.

The week which has started will be quite interesting as the markets will closely watch how and when the G7 countries of the group of industrialized countries will implement the planned ceiling price for Russian oil. This will certainly affect the prices of final products in the European wholesale market, which have not yet responded to the crude oil price meltdown that started at the end of last week.