The interregnum

Published at 10:40 15 Jun 2018 by . Last edited 15:12 5 Nov 2018.

ICE gasoil spreads have trended lower over the past month (barring the expiry of the June contract) thanks to the quirks of ARA pricing, but elsewhere the data continue to back our view that stocks are drawing hard. Indeed, if the spike in June prices on a few refinery wobbles and the risk of a French farmers’ strike is any guide, for autumn spreads to persist in contango would require a singular disruption to demand, which is not our base case.

For now, however, our assessment of the short-term market fundamentals is largely unchanged. On our balances, European diesel stocks will likely build over July and August, much of which will happen in ARA, before a pre-turnaround bid in September sets off renewed draws.

Globally, our prognosis is largely unchanged too. H2 18 runs will swing higher by some 1.8 mb/d y/y, but this level of throughputs will be needed merely to maintain last year’s rate of global stockdraws, unless demand spectacularly flops—something we are not expecting.

Weak April demand readings in France and Saudi Arabia in the past week or so have caused a few jitters among bulls, but there is nothing fundamentally new here. The main change to our demand balance is a 30 thousand b/d cut linked to mounting risks in Latin America amid higher prices, weakening currencies and political turmoil. All in all, our H2 18 demand growth is still unlikely to fall much short of 0.7 mb/d.

With global diesel supply and demand out of alignment, the market is wondering how it will cope with the shift in marine fuel specs set to take effect in 2020. This month, we release the first iteration of our 2019 balances. Unsurprisingly, Q4 19 looks tighter y/y as the market gets ready for 70% or more of the 4+ mb/d of global HSFO bunker demand to shift to 0.5% sulphur IMO-compliant fuels in 2020.

But while IMO 2020 is an unprecedented tightening of global bunker specifications, it is also an unprecedented loosening of global distillate specs, creating ample opportunities for refiners to segregate streams previously absorbed into the fuel oil pool in the absence of an alternative outlet. For the first time in more than a decade, it is going to be easier for refineries to make distillates.

At the same time, nearly 3 mb/d of greenfield refining start-ups due online in 2019 could add 1.2 mb/d alone of high-quality diesel to global supplies, and many of these are first-half loaded. The distillates fireworks display that some are positioning for in Q4 19 may therefore be less explosive than expected, though we still expect distillate demand to outpace supply during the period, off an already tight Q4 18 base.

For us, the biggest challenge from IMO 2020 is the need to wipe out huge amounts of surplus HSFO output. IMO can’t just be about raising clean product cracks, because this will enable simple refineries to stay in business. Most of the work needs to happen at the dirty end of the barrel in order to drive simple refineries with high HSFO yields out of business.

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