Europe has a diesel problem; refiners are feeling the heat
Europe, one of the world’s biggest diesel consumers, faces a major glut which combined with weak demand is weighing heavily on the ability of the region’s refineries to keep running.
Having hit record lows at the height of the COVID-19 pandemic in April and May, European diesel margins are trending lower again after posting a modest recovery in July, data from benchmark provider S&P Global Platts shows.
European Diesel Margins - here
“Gasoil [and diesel] is 40%-50% of refining output so it has to be profitable otherwise refineries just burn cash and must shut down,” Hayal Ahmadzada, chief trading officer at Azerbaijain’s SOCAR Trading said.
He said the paper market was showing some traders expect diesel cracks to fall close to zero or even into negative, which would be unprecedented.
“There are too many refineries for current demand,” he said, adding some won’t be able to operate at those levels for much longer.
While the easing of lockdowns in recent months across Europe has boosted diesel demand, some countries are seeing the recovery stall.
According to leading Spanish fuel distributor CLH, August diesel deliveries to the domestic market were around 9% lower than July levels at 2 million cubic meters.
Experimental data from Britain’s Department for Business, Energy & Industrial Strategy shows that in the past four weeks a recovery which started in mid-April in road fuel demand has stalled.
The diesel market is also afflicted with high stocks.
According to oil analytics firm Vortexa, Europe now accounts for the biggest share of global middle distillates floating storage globally.
Europe's Share of Global Oil Product Floating Storage graphic - here
Global Oil Product Floating Storage graphic - here
Oil Product Floating Storage in Europe graphic - here
At the same time, imports into Europe from other regions rose in August, Vortexa data shows.
European Middle Distillate Imports graphic - here
WEAKNESS EVERYWHERE
The global diesel picture is also bearish.
“Diesel stocks are off the charts in the United States,” Trafigura chief economist Saad Rahim said.
Constrained by high distillate stocks and weak demand, some U.S. refiners are planning to keep runs at lowered rates to manage the glut.
“Middle distillate weakness can be seen in all regions, with Asia hit hardest given its structural length in gasoil/diesel and jet,” JBC Energy said.
In China, independent refiner stocks of gasoil/diesel are nearly three times their normal levels, Rahim said.
“You need either aggressive demand or refinery runs to fall,” he added.
Editing by Veronica Brown and David Evans
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