Diesel profit margins are collapsing as new refineries increase supply and mild northern hemisphere weather and slowing economic activity reduce demand, putting further downward pressure on oil price.
Declining refining margins for diesel, one of the world’s leading industrial and transportation fuels, has already prompted some refiners in Asia to reduce the volume of crude oil they process in order to cut their diesel production.
OPEC+ producers meet in early June to decide the fate of a series of supply reductions agreed since the end of 2022.
Although the group has not yet started formal discussions, sources told Reuters that the group could maintain the cuts of 2.2 million barrels per day (bpd) beyond June if demand does not does not straighten up.
On May 8, the price of Brent fell to its lowest level in two months, below $82 per barrel, due to rising inventories and falling demand. They recovered some losses on Thursday, but are on track to lose more than 4% since the start of the month, after four months of increases.
“OPEC+ is expected to face mixed performance in refined products markets: gasoline crack spreads have improved steadily, but diesel crack spreads have deteriorated markedly,” JP Morgan said, adding that it expects The alliance was expected to maintain production cuts beyond June.
European diesel profit margins fell to less than $16 a barrel at the end of April, the lowest level in 11 months, after reaching more than $40 in February.
The difference between U.S. diesel and crude oil, known as the “crack spread,” fell to $20 in April, its lowest level in two years, in the major trading centers of New York and the Gulf Coast, when it was above $40 a barrel in February, according to an analysis by Commodity Context.
Margins on Asian diesel averaged $17 a barrel in April, down from $22 in the first quarter.
INCREASE IN PRODUCTION, DECLINE IN DEMAND
Analysts say the mild winter weighed on diesel demand over the past two quarters as it led to fewer purchases of heating oil.
The increase in production also weighs on prices. Global refining capacity increased by 2 billion barrels per day last year, the biggest increase since 1977, according to energy brokerage StoneX, thanks to the launch of new projects in Oman, Kuwait and Nigeria .
Refiners will add another 200,000 bpd of diesel production capacity this year, according to StoneX.
In Europe, where diesel is used more in cars than elsewhere, the transition to hybrid or electric cars is also weighing on demand.
JP Morgan noted that demand for road diesel on the continent has contracted by 50,000 bpd over the past year.
In the United States, another type of structural change is underway, with an increasing volume of biofuels replacing diesel.
Demand for petroleum-derived diesel on the U.S. West Coast hit its lowest level in nearly 28 years in January, while consumption of renewable diesel and biodiesel hit a record high, data from the American government.
Furthermore, the slowdown in industrial activity in China, the euro zone and the United States last month weighed on diesel demand.
“Now that the peak heating season is over, the problem is more related to the general industrial slowdown […] and the fact that the car fleet is slowly moving away from diesel,” said Natalia Losada, an analyst at consultancy Energy Aspects.
Since mid-April, the European and American diesel futures markets have been trading in contango, that is to say that the current contract is trading at a discount compared to the upcoming contract, which is a sign of supply glut and a signal for traders to stockpile the fuel in order to make a better profit later. On May 3, the margin on European diesel at 6 months reached almost 12 dollars per tonne in contango, its highest level in a year.
If the diesel market is in contango, this is not the case for the crude oil market. The benchmark Brent is in backwardation, the opposite of contango, and therefore always signals market tightening.
“It is likely that the current strength in crude curves, which reflects a tight crude market, will dissipate in a short time due to a likely decline in the number of refineries,” said Bjarne Schieldrop, analyst at SEB.
Refining margins in Asia are near their lowest level in a year.
Taiwan’s Formosa Petrochemical Corp, one of Asia’s largest exporters of refined products, cut its May run rate by about 3 percentage points.
South Korea’s second-largest refiner, GS Caltex, is cutting production by 20,000 to 30,000 bpd in May, according to trade sources.
SUPPORT FROM CHINA, JET FUEL
Two Singapore-based trade sources said lower Chinese exports in April and May, due to refinery maintenance, could provide some support to the Asian diesel market.
Bank of America analysts said support could also come from increased air traffic increasing demand for jet fuel, which could prompt refiners to produce more aviation fuel and less diesel. (Additional reporting by Robert Harvey; editing by Dmitry Zhdannikov, Simon Webb and Elaine Hardcastle)
