Wave of diesel heads to Europe, pressuring refiners

Refineries around the world have cut output in recent months in response to the unprecedented drop in demand due to movement restrictions imposed by governments to limit the spread of the coronavirus epidemic.

But that may prove insufficient after countries including India extended lockdown measures and others, including many European countries, recover activity at a slow pace, traders and analysts said.

The weak demand led to a rise in global diesel stocks and has put heavy pressure on profit margins for converting crude oil into diesel which last week hit an 11-year low below $5 a barrel, according to Reuters calculations.[ARA/]

“Cutting refinery runs further means shutting units. It is much harder for refiners to make that decision but it will have to happen,” a source at a European refiner said.

Over 3 million tonnes of diesel are set to arrive in Europe in May, up from a previous record of 2.8 million tonnes in June last year, according to Refinitiv data.

The sharp rise in fuel exports from Asia comes after China’s refineries cranked up operations in April following the easing of lockdown measures were eased.

Oil demand in the world’s top energy consumer is however recovering slowly, leading to higher exports from China.

The collapse in fuel demand initially hit jet fuel and gasoline the hardest, while diesel refining margins, or cracks, held well due to ongoing industrial activity.

With diesel accounting for around 50% of global refinery output, plants must now prepare to shut down crude distillation units, Vienna-based consultancy JBC Energy said in a note.

“Diesel cracks only last week started to plumb new record lows – this difference in timing in our view doesn’t signify a sudden drop off in diesel demand, but is rather the primary signal to reduce crude distillation.”

Additional reporting by Koustav Samanta in Singapore; editing by David Evans

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