By Ahmad Ghaddar, Trixie Yap and Shariq Khan
LONDON/SINGAPORE/NEW YORK (Reuters) – Diesel profit margins are falling as new refineries increase supply and mild northern hemisphere weather and sluggish economic activity eat into demand, putting oil prices under even greater pressure. more downward pressure.
Lower refining margins for diesel, one of the world’s leading industrial and transportation fuels, have already led some refineries in Asia to reduce the volume of crude oil they process to reduce their diesel output.
Weaker demand has caused oil prices to fall sharply in recent weeks and OPEC+ producers met in early June to decide the fate of a series of supply cuts agreed since the end of 2022.
Although the group has not yet started formal discussions, sources told Reuters the group could maintain cuts of 2.2 million barrels per day (bpd) after June if demand does not increase.
Brent crude prices fell to a two-month low of below $82 per barrel on May 8 as inventories rose and demand fell. They recovered some losses on Thursday, but are on track to lose more than 4% this month after four months of gains.
“[OPEC+] would need to address mixed performance in refined products markets – gasoline cracks have improved steadily, but diesel cracks have deteriorated sharply,” JP Morgan said, adding that it expects the alliance to maintain production cuts beyond June.
European diesel profit margins fell to less than $16 per barrel at the end of April, an 11-month low, having reached more than $40 in February.
The difference between U.S. diesel and crude oil, known as the crack spread, fell to a 2-year low of $20 in April in the major trading centers of New York and the Gulf Coast, from more than U.S. $40 per barrel in February, according to a commodities report. Context analysis.
Asian diesel margins averaged $17 per barrel in April, down from $22 in the first quarter.
INCREASED PRODUCTION, WEAKER DEMAND
Analysts say a mild winter has affected diesel demand in the past two quarters as it has meant fewer purchases of heating oil.
Increased production is also weighing on prices. Global refining capacity increased by 2 bpd last year, the most since 1977, energy broker StoneX said, as new projects were launched in Oman, Kuwait and Nigeria.
Refineries will add another 200,000 bpd of diesel capacity this year, StoneX said.
In Europe, where diesel is used in cars more than elsewhere, the switch to hybrid or electric cars is also eating into demand.
JP Morgan noted that demand for highway diesel on the continent declined by 50,000 bpd over the past year.
In the US, a different kind of structural change is underway, with a growing volume of biofuels replacing diesel.
Demand for petroleum-based diesel on the U.S. West Coast reached its lowest level in nearly 28 years in January, while consumption of renewable diesel and biodiesel reached an all-time high, according to U.S. government data.
Meanwhile, the slowdown in factory activity last month in China, the euro zone and the United States dragged down demand for diesel.
“Now that the peak heating season is over, the issue is more related to the general industrial slowdown… and the car fleet slowly moving away from diesel,” said Natalia Losada, an analyst at consultancy Energy Aspects.
Diesel futures markets in Europe and the US have been trading in contango since mid-April – where a current contract trades at a discount to a contract for a later date – a sign of oversupply and a signal for traders to stockpile the fuel to make better profits later. . On May 3, the European 6-month diesel spread reached almost 12 dollars per ton in contango, the highest in a year.
Although the diesel market is in contango, the crude oil market is not. Benchmark Brent crude is in retreat, the opposite of contango, and therefore still signaling market tightness.
“The current initial strength in the oil curves, reflecting a current tight oil market, is likely to dissipate before long due to likely lower refinery operations,” said SEB analyst Bjarne Schieldrop.
Refining margins in Asia are stuck near one-year lows.
Taiwan’s Formosa Petrochemical Corp, one of Asia’s biggest refined products exporters, cut its May run rate by about 3 percentage points.
South Korea’s second-largest refinery, GS Caltex, is reducing output by 20,000 to 30,000 bpd in May, trade sources said.
SUPPORT FROM CHINA, JET FUEL
Some support for the Asian diesel market may come from a drop in China’s exports in April and May due to refinery maintenance, two Singapore-based trading sources said.
Bank of America analysts said support could also come from increased air traffic, increasing demand for jet fuel, which could prompt refineries to produce more jet fuel and less diesel.
(Additional reporting by Robert Harvey; Editing by Dmitry Zhdannikov, Simon Webb and Elaine Hardcastle)
