There is an undeniable glut of supplies in global middle distillates markets but the world is already working off the excesses of the summer of 2013. It will take time to restore balance, however. Heavy turnarounds on the Gulf Coast in Q1 14 and in Asia in Q2 14 will go a long way to achieving this goal but demand growth will play an equally important role.
Seasonality will be marked in the distillates market this year with soft periods at the start and later in the year bookending the more buoyant summer months as the global gasoil glut of 2013 is finally worked off. However, the growth of Middle Eastern refining capacity will force Asian exporters to cut prices to clear the market, initiating a cycle of competition towards the end of the year for market share in Europe.
Diesel fuel demand growth will accelerate in 2014 as the United States and Western Europe pick up steam, offsetting an anticipated second year of slow demand growth for middle distillates from China and India. Elsewhere in Asia demand growth will be strong while a slowdown in refinery capacity additions will give regional markets a chance to catch up.
Refinery troubles will drive up Latin American imports. Venezuela, formerly a gasoil exporter, must now buy diesel fuel to meet power generation requirements. Following a late December fire at its biggest refinery, crude oil throughputs have been cut again and imports are likely to rise again while jet fuel exports will fall. Meanwhile in Brazil, refinery problems are creeping up after months of high utilization that will likely curb processing until new capacity is added at the end of the year.
Base effects will help Europe register middle distillates consumption gains in 2014 even with a warm winter that is sapping heating oil demand. But Germany and Britain, the two best performing economies in western Europe, are already showing impressive improvements in diesel demand.
Russian ULSD exports to Europe may soon surpass 0.25 mb/d, but after that point infrastructure challenges will make incremental growth more difficult for Russian producers. One solution may be to convert the pipeline connecting Russian refineries to the Ventspils terminal in Latvia to ULSD service, a measure some Russian firms are already lobbying for, but which is only likely to go ahead if Rosneft wants it to happen.
Middle Eastern middle distillates markets will come close to balance this year although delays to Saudi Arabia's 0.4 mb/d Yasref refinery may put that off until 2015. The shrinking Middle Eastern supply gap will put pressure on Asian middle distillates prices, however, as they will have to fall to allow exports to be placed into more distant markets.
Jet fuel prices have staged a modest recovery in some markets, rising against diesel fuel. But Asian jet regrades have collapsed amid poor kerosene demand in Japan that has forced Japanese refiners to step up exports and cut runs. Finally, Chinese refineries have also begun to reduce runs amid sluggish domestic fuel sales.