Global distillate markets are depressed and there are few positive catalysts on the horizon. Excess refinery capacity and rising runs in Europe are forcing prices lower. But much of the bad news is already priced in. A further downturn in diesel prices would devastate European refining margins and prompt run cuts, which would likely be a solid buying opportunity.
Without cutbacks in European supply, however, the forward structure of European diesel looks vulnerable. With demand picking up in Germany and Spain, refiners in these countries will keep runs at relatively high levels. The onus to cut production will fall on the countries where distillate demand has remained weak, such as France and Italy, but this is unlikely to be sufficient to offset rising supplies elsewhere. The biggest downside risk comes later in the summer once spot Middle Eastern demand fades, with the risk that the European gasoil curve flips into contango.
Indeed, Russian ULSD production continues to increase with yet another refinery-the 0.135 mb/d Orsk plant-joining the ranks of exporters. New outlets for ULSD, including Ust-Luga, are springing up. This will continue to put downward pressure on European ULSD prices. We look closely at Russian refinery upgrades in a special section of this month's report.
Similarly, a heavier than usual maintenance schedule in May on the US Gulf Coast is constraining crude oil runs for longer than we had expected, but by June most of the work will be done, opening the door to a rapid increase in throughputs.
Even Asian balances continue to weaken. Chinese diesel demand has stabilised according to preliminary April data, with construction activity recovering somewhat. While we do not expect a robust recovery in Chinese oil demand this year, some modest growth will occur. But increased domestic demand will allow Chinese refiners to raise runs due to excess refining capacity in China. This will do little for hard-pressed traditional export refineries, such as plants in Singapore, which are being squeezed by China's conversion into a net oil products exporter.
In the very near-term, however, weather poses some modest upside risk. The late arrival of Indian monsoons aside, drought conditions in South America are likely to spur strong diesel imports in the coming months. Colombia has reduced natural gas exports to Venezuela to preserve domestic supplies amid the risk of hydroelectricity shortfalls. Brazil is also stockpiling diesel as a precaution. Argentina's gasoil imports may surpass 0.1 mb/d for the first time since 2011 this June as it imports gasoil to meet peak winter power demand.
Global jet fuel markets have tightened up with the seasonal upswing in demand and extensive refinery maintenance. Thin stocks in the US have allowed traders to divert cargoes away from glutted European markets, which has helped European jet prices recover. Tight stocks on the US West Coast may now draw Asian gasoline across the Pacific. But Middle Eastern demand growth will slow temporarily as a major runway upgrade in Dubai cuts the number of flights.