Distillate summary: European diesel at 6-wk lows as imports continue

18 Nov 2022

Quantum Commodity Intelligence – Wholesale diesel prices crashed to the lowest level in six weeks this week as sustained warm weather in Europe kept demand in check and supply continues to arrive from east of Suez.

Cargoes delivered into northwest Europe were assessed at $1,010/mt on Friday versus $1,069/mt a week earlier, the lowest level since late September.

Weaker crude helped push prices down with refining margins for diesel hovering at a six-week low, with the CIF NWE assessment at $48.6/b versus $48/b a week earlier.

Threats of a strike at BP Rotterdam did little to impact that bearishness with the market seen well supplied, as non-Russian imports from outside Europe hit a record 1 million bpd.

10ppm premiums for cargoes loading in the Middle East were said to be over $10/b above where the theoretical netback to Singapore is. That compares with a much more typical $1-2/b, highlighting that every spare barrel is heading west.

New refineries in China and the Middle East are set to fire up over the next few weeks and that will add some supply, all of which will directly or indirectly boost availability.

The curve is not reflecting that, however, with backwardation in the low sulfur gasoil futures December and January contracts narrowing from $20/mt to $12/mt in the week of November expiry.

That is down to the short-term supply fears evaporating, although analysts at Vortexa said that the three issues of European winter, loss of Russian supply and low stocks could keep refining margins around the $50/b mark for the foreseeable future.

The major unknown is tertiary stock levels at end users, which Vortexa believes are relatively high due to steep imports, low consumption data and low stocks in commercial tanks.

“Pretty much every business owner with a diesel exposure is following the news headlines, talking about the worst winter in Europe since the Second World War and likely related diesel squeezes. If that assumption is true, it would mean that import levels are set to cool in line with Northern Hemisphere temperatures,” David Wech, chief analyst said.

Dutch workers, which are facing inflation at 16%, are still mulling industrial action at refineries and demanding what the operator says is unreasonable pay increases, which is providing some upside demand that the winter is not bringing.

Further bearishness came from the weekly EIA data which showed US stocks rising to a seven-week high of 107.4 million barrels as demand tumbled 7% on the week, 11% under the same week in 2019.

However, while stocks have increased during four of the five past weeks, they remain near their lowest on record ahead of the winter heating period and are down over 8 million barrels versus the same week in 2019.

It was a similar picture in Asia with 10ppm cargoes valued at $125/b, down $10/b in a week, with refining margins versus Brent losing $4/b over the same time frame.

The east-west has broadly been static and data this week showed that while Indian processing rates are rising and output soaring, it’s staying within the country rather than exported.

Chinese output in October for diesel hit a record high for the second straight month, while exports were 1.06 million mt, down from September’s high of 1.73 million mt, although double from October last year.

Jet fuel

Jet fuel cargoes into Europe maintained their $42/mt premium over diesel cargoes as travel demand gradually picks up going into the end-of-year period, while domestic refineries continued to favour diesel output.

While global airline seats were static this week at 90 million, travel data firm OAG expects them to rise 4% next week in the run up to Thanksgiving and reach 98.5 million in the week to Christmas.

That would narrow the gap to pre-Covid levels to just 7%, compared to the 12-14% throughout 2022.

Jet fuel cargoes CIF NWE were last assessed at $1,052/mt, compared to $1,109/mt a week ago, while the crack firmed $1.30/b on the week to $46.2/b.

The regrade in Asia also narrowed with the premium of diesel over jet fuel ending the week at $6.57/mt, a level last seen in late September.

Outright jet prices in Asia were down nearly $10/b on the week to a six-week low of $118.86/b, equivalent to a crack of $29.39/b, down $3.87/b.