Global distillate refining margins plummet on weak demand

Margins to refine crude into distillates like heating oil and diesel have slumped around the globe due to disappointing demand, prompting speculation that some refiners could start to reduce processing rates.

In the United States, imports from markets including Europe have boosted supply, while milder weather has undercut distillate demand, which typically rises during winter. That is oversaturating a market, especially in the Northeast - the country’s biggest heating oil market - where inventories are already high.

U.S. distillate margins HOc1-CLc1 have fallen to the weakest level since July 2018, plunging to $18.60 a gallon on Friday, according to Refinitiv data. Benchmark U.S. heating oil futures slid to the lowest in three months on Friday.

“Distillate cracks (margins) are off about $4 since the beginning of last week so econs are changing rapidly,” one U.S. trader said.

Even with margins collapsing, additional imports from Canada are expected, another U.S.-based trader said.

U.S. distillate stockpiles last week climbed to the highest seasonally since 2017, with a notable build on the East Coast, while distillate demand dropped unseasonably last week to its lowest since 2017, according to U.S. Energy Information Administration data.

Speculators that had amassed bullish positions in distillates ahead of a new maritime law at the start of the year that was expected to boost demand for such fuels have begun unwinding them as the rule change has had limited impact on distillate supplies so far, traders said. This has further eroded distillate margins, they said.

Margins have dropped abroad as well.

European diesel margins LGOc1-LCOc1 fell below their 10-year average for this time of the year to $11.39 a barrel on Friday.

Gas oil stocks in independent storage in the Amsterdam-Rotterdam-Antwerp (ARA) refining and storage hub were broadly steady in the week to Thursday at 2.58 million tonnes, data from Dutch consultancy Insights Global showed. Supplies in the region were ample as January diesel imports into Europe from East of Suez are at the highest on record.

Asian refining profit margins for jet fuel, another distillate product, have slumped to their lowest in more than eight months, weighed down by weak aviation demand and a drop in heating oil use due to the warm winter in Northeast Asia.

Light distillate stocks in Singapore rose 1.07 million barrels, to near a nine-month high of 13.1 million barrels in the week to Jan. 15, while fuel oil stocks rose 831,000 barrels to a more than six-month high of 22.7 million barrels, Enterprise Singapore data showed.

Reporting by Devika Krishna Kumar and Stephanie Kelly in New York; additional reporting by Ron Bousso in London Editing by Marguerita Choy

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