Jump in supply and sluggish demand keep heat on diesel
• Lower margins for the fuel prompt some Asian refiners to trim volume of crude oil they process to reduce output
Profit margins for diesel are slumping as new refineries boost supplies, and mild weather in the northern hemisphere and slow economic activity eat into demand, putting oil prices under further downward pressure.
The lower refining margins for diesel, one of the world’s key industrial and transport fuels, have already prompted some refiners in Asia to trim the volume of crude oil they process to reduce their diesel output.
Weaker demand has caused crude oil prices to fall sharply in recent weeks and Opec+ producers will meet in early June to decide on the fate of a series of supply cuts agreed since late 2022. While the group has yet to begin formal discussions, sources said the group might maintain cuts of 2.2-million barrels per day (bpd) beyond June if demand failed to pick up.
Brent crude prices slumped to a two-month low below $82 on Wednesday on rising inventories and slipping demand. They recovered some ground on Thursday but are on track to lose more than 4% so far in May after four months of gains.
Opec+ would “need to contend with the mixed performance in refined product markets — [petrol] crack spreads have improved steadily, but diesel cracks have markedly deteriorated”, JPMorgan said, adding that it expected Opec+ to keep its production cuts beyond June.
European diesel profit margins slid to below $16 a barrel in late April, an 11-month low, after having hit more than $40 in February.
The difference between US diesel and crude oil, known as a crack spread, eased to a twoyear low of $20 in April at the main trading hubs in New York and the Gulf Coast from above $40 a barrel in February, according to a Commodity Context analysis.
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Asian diesel margins averaged $17 a barrel in April, down from $22 in the first quarter.
Analysts say that a mild winter hit diesel demand over the past two quarters, as it meant less buying of heating oil.
Rising output is also weighing on prices. Global refining capacity rose 2-million bpd last year, the most since 1977, energy brokerage StoneX said, as new projects were launched in Oman, Kuwait and Nigeria.
Refiners would add another 200,000 bpd of diesel capacity this year, StoneX said.
In Europe, diesel is used more in cars than elsewhere. But the shift to hybrid or electric cars is also eating into demand.
JPMorgan noted that road diesel demand in the continent contracted by 50,000 bpd over the past year.
In the US, a different kind of structural change is under way, with a rising volume of biofuels displacing diesel.
US West Coast demand for petroleum-derived diesel hit its lowest in nearly 28 years in January, while consumption of renewable diesel and biodiesel hit a record high, according to US government data.
Meanwhile slowing factory activity last month in China, the eurozone and the US has dragged on diesel demand.
“Now that peak heating season is over the issue is more related to general industrial slowdown … and to the car fleet slowly moving away from diesel,” said Natalia Losada, an analyst at consultancy Energy Aspects.
Since about mid-April, European and US diesel futures have been trading in contango, with current contracts trading at a discount to contracts for a later date. It is a sign of oversupply and a signal for traders to store the fuel for better profit later.
On May 3, the six-month European diesel spread reached nearly $12 a tonne in contango, its widest in a year.
While the diesel market is in contango, the crude market is not. Benchmark Brent crude is in backwardation, the opposite of contango, and therefore still signalling market tightness.
“It is likely that the current front-end strength in crude curves, reflecting a current tight crude market, will dissipate in not too long due to likely lower refinery runs,” SEB analyst Bjarne Schieldrop said.
Refining margins in Asia are stuck near one-year lows.
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Taiwan’s Formosa Petrochemical, one of Asia’s largest refined products exporters, cut its May run rate by about three percentage points.
South Korea’s second-largest refiner, GS Caltex, is trimming output by 20,000-30,000 bpd in May, trade sources said.
Some support for the Asian diesel market could come from declines in exports from China in April and May due to refinery maintenance, two Singaporebased trade sources said.
Bank of America analysts said support could also come from surging air traffic, which is raising demand for jet fuel. That could prompt refiners to produce more aviation fuel and less diesel.