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Bear market for diesel spells fresh problems for oil

Revenue margins for diesel are slumping as brand-new refineries boost supplies and as mild weather condition in the northern hemisphere and slow economic activity eat into demand, putting oil costs under further down pressure.

The lower refining margins for diesel, one of the world's. crucial industrial and transportation fuels, have already triggered some. refiners in Asia to cut the volume of crude oil they process to. decrease their diesel output.

Weaker demand has actually seen petroleum rates fall dramatically in. recent weeks and OPEC+ manufacturers fulfill in early June to choose. the fate of a series of supply cuts concurred considering that late 2022.

While the group is yet to begin formal discussions, sources. told the group may keep cuts of 2.2 million barrels per. day (bpd) beyond June if demand fails to pick up.

Brent crude rates plunged to a two-month low of. below $82 a barrel on May 8 on rising stocks and slipping. need. They recuperated some losses on Thursday, but are on track. to lose over 4% up until now this month after four months of gains.

[OPEC+] would ... require to compete with the blended. performance in refined item markets-- gasoline fracture spreads. have actually improved steadily, but diesel cracks have considerably. deteriorated, JP Morgan said, including that it expected the. alliance to keep production cuts beyond June.

European diesel revenue margins moved to listed below $16 per barrel. in late April, an 11-month low having struck over $40 in February.

The difference in between U.S. diesel and crude oil, called a. crack spread, reduced to a 2-year low of $20 in April at the primary. trading hubs in New york city and the Gulf Coast from above $40 a. barrel in February, according to a Product Context analysis.

Asian diesel margins averaged $17 a barrel in April, down. from $22 in the first quarter.

RISING OUTPUT, WEAKER NEED

Experts state that a mild winter hit diesel demand over the. last two quarters, as it suggested less purchasing of heating oil.

Rising output is also weighing on costs. Global refining. capability increased by 2 bpd in 2015, the most since 1977, energy. brokerage StoneX said, as new tasks were introduced in Oman,. Kuwait and Nigeria.

Refiners will include another 200,000 bpd of diesel capacity. this year, StoneX said.

In Europe, where diesel is utilized more in automobiles than elsewhere,. the shift to hybrid or electric automobiles is also consuming into demand.

JP Morgan noted that road diesel demand in the continent. contracted by 50,000 bpd over the previous year.

In the U.S., a various type of structural modification is. underway, with a rising volume of biofuels displacing diesel.

U.S. West Coast demand for petroleum-derived diesel hit its. most affordable in nearly 28 years in January, while consumption of. renewable diesel and biodiesel hit a record high, according to. U.S. government data.

Slowing factory activity last month in China, the. Euro zone and the United States has dragged out diesel demand.

Now that peak heating season is over the problem is more. associated to basic commercial slowdown ... and to the automobile fleet. gradually moving away from diesel, Natalia Losada, an expert at. consultancy Energy Aspects, said.

European and U.S. diesel futures markets have actually been. trading in contango given that around mid-April - where a present. agreement trades at a discount rate to a contract for a later date - a. sign of oversupply and a signal for traders to keep the fuel. for better profit later. On May 3, the 6-month European diesel. spread << LGOc1-LGOc7 > reached nearly $12 a tonne in contango, its. largest in a year.

While the diesel market is in contango, the unrefined market is. not. Benchmark Brent crude remains in backwardation, the reverse of. contango, and therefore still signalling market tightness.

It is most likely that the present front-end strength in crude. curves, showing a current tight crude market, will dissipate. in not too long due to likely lower refinery runs, SEB expert. Bjarne Schieldrop said.

Refining margins in Asia are stuck near 1 year lows.

Taiwan's Formosa Petrochemical Corp, among Asia's. largest improved items exporters, cut its May run rate by. about 3 percentage points.

South Korea's second-largest refiner, GS Caltex, is trimming. output by 20,000-30,000 bpd in May, trade sources said.

ASSISTANCE FROM CHINA, JET FUEL

Some support for the Asian diesel market could come from. declines in exports from China in April and May due to refinery. maintenance, 2 Singapore-based trade sources stated.

Bank of America experts said assistance might also originate from. rising air traffic raising demand for jet fuel, which could. prompt refiners to produce more aviation fuel and less diesel.

(source: Reuters)