Europe Increases Imports of Russian Fuel Oil

Crude oil is trading at 103.98 dollars a barrel today, up 0.69 percent, as measured by the United States Oil Fund (USO), even as the fund sits deep in oversold territory with a relative strength index of 30.13 and well below the top of its 52 week range of 102.42 to 154.08. The modest bounce comes against a backdrop of shifting fuel oil trade flows between Russia, Europe and the United States that illustrate just how tangled global refining supply chains have become.

Russian Fuel Oil Finds a New Home, Then Leaves Again

Roughly 500,000 barrels a day of Russian fuel oil flowed into Europe on average over the past five years, but that volume has been sliding steadily since 2019. In 2020 it dropped to around 375,000 barrels a day, though November and December brought a noticeable rebound. For a stretch earlier in the year, American refiners on the Gulf Coast stepped in as the main buyer of Russian high sulfur fuel oil, using it as a cheap secondary feedstock for coker units after Venezuelan and Iranian barrels were locked out by sanctions and Mexican output kept declining. That arrangement helped keep Russia's northwestern refineries running at a time when Europe was rapidly cutting its appetite for high sulfur products.

Starting in November 2020, though, the pattern reversed. Exports bound for the United States became scarcer while shipments back to Europe picked up again. Part of that shift traces to real supply disruptions: refining runs in the US dropped roughly 15 percent in a two week span in mid November after Hurricane Zeta and ongoing pandemic disruptions hit operations. Seasonal maintenance also pulled about 2.5 million barrels a day of refining capacity offline during the final two months of 2020, trimming the volume of fuel oil that needed a home.

The Middle East, Not Europe, Is the Real Destination

December 2020 data shows the primary market for high sulfur fuel oil wasn't actually Europe itself. Most Russian fuel oil produced in the Baltic region lands first in the Amsterdam Rotterdam Antwerp hub, then gets re exported onward, often to Saudi Arabia and other Middle Eastern buyers. European fuel oil shipments to the Middle East jumped 300 percent month over month heading into October, with more than a million tons of high sulfur fuel oil moving east. That flow accelerated further in December, when seven million barrels crossed from Europe to Middle Eastern customers across 19 separate deliveries.

Russia's own export terminals reflect this resilience. Ust Luga, the country's main fuel oil port, is on pace to ship 15.5 million tons for the year, a decline of only about 2 percent from 2019. Competing Baltic ports such as Klaipeda, Riga and Sillamae saw double digit drops over the same period. Fuel oil, alongside naphtha and gasoline, held up better than most other refined products in 2020, and Russia even saw an unusual surge in fuel oil loadings out of Nakhodka in the Far East between May and July, more than doubling that port's annual volume.

What the Pullback in US Bound Barrels Really Means

The falloff in Russian fuel oil reaching American shores looks steep on paper, but seasonal demand patterns explain much of it. High sulfur fuel oil use in power generation typically slows in winter months as air conditioning demand fades, which naturally reduces the pull for the product regardless of geopolitics. Gulf Coast refiners still have strong incentive to use the material, particularly since several of them have invested in desulfurization units in recent years specifically to process it.

Whether Russian barrels keep flowing to the US Gulf Coast at meaningful volumes now hinges largely on how saturated the Middle Eastern market becomes. If Saudi demand stays elevated or if scrubber installations expand across Singapore's shipping fleet, that would likely pull more Russian fuel oil eastward and away from American refiners. For now, USO's oversold reading and its position near the bottom of its 52 week range suggest the broader crude complex remains under pressure, even as individual product flows like fuel oil shift between continents for reasons that have little to do with the daily price tape.