The conditions for a tight Q1 18 are drifting into place. In addition to heavy Middle Eastern turnarounds, Indian demand is set to pick up by 0.1 mb/d y/y in Q1 18, easily outpacing domestic supply growth, while fears of a flood of Chinese exports early next year are receding. Price-related demand risk is an outlying threat, but global trade indicators suggest economic activity, particularly in the OECD, is gathering momentum.
The market will naturally be tracking the ramp-up of several new Chinese refineries, potentially totalling 0.5 mb/d, but project delays are growing, Chinese demand is solid, off-road fuel specifications are tighter, and the government’s focus on the environment likely means little growth in product export quotas in 2018.
The other key swing factor for East of Suez diesel this year has been India, amid softer demand and surging runs. But Indian diesel exports should start to swing lower by around 50-100 thousand b/d from next year, as domestic demand picks up and destocking by refiners that had accumulated barrels ahead of maintenance but ended up deferring works comes to an end.
The market will also be looking at the potential for price rises to dent demand. But in Europe, where weighted average Eurozone gasoil pump prices are running higher y/y by 9.5% so far this year, price rises have done nothing to halt the resurgence in business confidence and construction. In our view, price-related demand risk is weighted towards H2 18 in any case. Demand in H1 18 looks strong and supply growth will be limited.
The trend is present beyond Europe. From the US to Australia, diesel demand has performed strongly as the global economic recovery has become more entrenched and global trade indicators, such as net tonnage transiting key shipping lanes like the Panama and Suez canals, have seen y/y growth soaring into double digits. In the US, despite a mild start to the winter and surging refinery runs, distillate stockbuilds over the past four weeks have been well below seasonal norms. This is not only due to robust export demand, with LatAm runs still weak, but also as domestic economic activity remains buoyant.
The improvement in OECD activity also has important implications for key exporting nations like China, given that the EU and the US are China’s largest and second-largest trading partners, respectively.
Yet, since the start of December, refining margins—particularly those in Europe—have started to plummet, prompting refiners to throttle back. The Forties Pipeline System outage has further tipped the balance for refiners reliant on North Sea crudes, causing the 0.21 mb/d Grangemouth refinery to cut runs.
But this is blunting refinery runs when stockbuilds are supposed to be at their fastest, which means the draws will be starting from a lower level than previously thought. In short, supplies have started to trend lower earlier than expected, just as winter demand has started to perk up, and the upcoming refinery works season will only serve to tighten supplies further amid what is still an extremely solid backdrop for diesel demand growth.