Countdown

Published at 09:30 17 Aug 2018 by . Last edited 15:12 5 Nov 2018.

The situation in ARA is getting better for bullish bets. The proximate cause is refinery problems, some caused by the heat in Europe, that have tightened up short-term balances just as refinery runs were supposed to be at maximum levels. Last month, we had forecast European diesel inventories would rise to around 420 mb at the start of September but this now looks to be an upper limit.

Probably the most important development in the ARA market is the major turnaround set for ExxonMobil’s 0.21 mb/d Rotterdam refinery over September-October. This work will help deplete ARA stocks just as Europe heads towards what looks to be a very heavy autumn maintenance season. Inventories could easily fall by 20 mb over September and October, in keeping with seasonal patterns.

The bulls, though bloodied by this year’s distillate underperformance at the start of the year, have already stirred, however, pushing spreads and cracks up again. Backwardation is going to pull surplus material out of tanks once again and turnaround activity does not peak until October, so real demand is needed to absorb these barrels, but in places it will struggle. Economic growth is coming up against capacity constraints and agricultural demand is weak in places like Germany and Poland, which have been hard hit by the heat. 

In the meantime, Asian refinery outages are capping resupply. Moving diesel from the Middle East and India is increasingly uneconomic as tightening balances East of Suez are helping to keep barrels at home amid a spate of problems at several Asian refineries, including Reliance’s Jamnagar complex. For ARA, a stronger Asian market spells a chance to consolidate the relative tightness caused by recent heatwave-related run cuts, as US exports are also down due to local refiners opting to keep more cargoes at home this month.

USEC refiners have a heavy autumn turnaround season planned, including a total shutdown of the 0.21 mb/d Trainer refinery. More importantly, there are massive shutdowns planned in the Midwest, where CDU outages are scheduled to jump from an average of 0.4 mb/d in September to 0.93 mb/d in October. PADD 2 is net short diesel, so this will increase the pull from waterborne markets. For instance, net diesel flows from PADD 1 to PADD 2 are typically around 60 thousand b/d, most of which comes from the New York Harbor.

CDU work is relatively modest this year on the USGC, and distillate exports from the USGC to Brazil have been falling since earlier this summer, thanks to higher Petrobras runs. But Mexican runs have fallen well short of expectations, so PADD 3 outflows to Mexico will remain strong, leaving less distillate exports for Europe.

We see little reason to change our view on the market that we articulated last month. Turnaround season will bring strength, but the rally in ICE gasoil spreads over the last month means a lot of the prompt tightness is already priced in at the front of the market. Still, barring a bout of unseasonably warm weather, it should be an exciting winter for diesel.

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