Tight supplies, heating demand drive global gasoil margins to multi-year highs

A worker walks along oil pipes at Dinh Vu oil port in Hai Phong city

By Mohi Narayan, Roslan Khasawneh and Ron Bousso

(Reuters) – Refiners globally are reaping the highest profits from gasoil production in years on stronger than expected demand and tight supplies despite concerns about the Omicron coronavirus variant's impact on the world economy.

Demand for the fuel used to power trucks, generators and machines remained strong even as COVID-19 cases surge across the world as measures taken by governments to curb the spread were less severe than in 2020, traders and analysts said.

Strong jet fuel prices have also reduced the availability of the middle distillate for blending into the diesel pool, they added.

Stronger that expected demand has led to a drawdown on stocks in key trading hubs such as Singapore, Amsterdam-Rotterdam-Antwerp (ARA), and the United Arab Emirates to the lowest in years, supporting prices and refining margins globally. Graphic: Global gasoil prices, https://fingfx.thomsonreuters.com/gfx/ce/mypmnbenavr/Pasted%20image%201642736211631.png

Asian refining margins for the benchmark gasoil grade with 10 ppm sulphur content have hit more than two-year highs, notching a profit of nearly 24% this month from December.

“Asian diesel demand has been robust, particularly from Australia, India and Southeast Asia, but supply has not been able to keep pace,” Serena Huang, analyst at Vortexa said.

China's diesel exports remained curtailed by tight export quotas, while exports from India in the first two weeks of January were also low compared with previous quarters, Huang added.

Analysts expect less exports from within the East of Suez region as key suppliers are facing strong domestic consumption, leaving them with almost no cargoes to ship.

“A 140,000 barrels per day uptick in Indian demand month-on-month, now almost equalling 2019 levels, is keeping a lid on the overall volumes available for export,” consultancy JBC Energy said in a note.

South Korean and Japanese diesel exports have also been ticking up since late December amid rising runs, but cumulatively flows remain below what the consultancy has observed in previous years, it added.

Singapore's middle distillate inventories edged up in January but remain near December levels which were hovering at their lowest since May 2018, Refinitiv data showed.

Graphic: Gasoil refining margins, https://fingfx.thomsonreuters.com/gfx/ce/zgvomagmdvd/Pasted%20image%201642738785387.png LESS ARBITRAGE SUPPLIES

Lower shipments from Asia and the United States have tightened supplies in Europe, pushing European benchmark diesel cracks well above the five-year average.

European gasoil margins are trading at their highest in five years, also partly because of very strong jet fuel prices which have meant refiners are blending less into the diesel pool, traders said.

Gasoil stocks held in independent storage in the Amsterdam-Rotterdam-Antwerp (ARA) refining and storage area fell 8% to 1,686 million tonnes in the week to Thursday, data from Dutch consultancy Insights Global showed, well below their 5-year average for this time of the year of around 2.475 million tonnes.

Adding to the tightness, Shell's 400,000-bpd Pernis refinery in the Netherlands, Europe’s largest, will go into maintenance until June.

However, traders expect the arbitrage from Asia to Europe to open very soon which could lead to a large flow of diesel.

In the United States, distillate stockpiles, which include diesel and heating oil, fell by 1.4 million barrels last week to 128 million barrels, the Energy Information Administration said on Thursday. [EIA/S]

“We would see the underlying support for gasoil being relatively healthy demand and a still cautious approach by refiners when it comes to increasing refinery runs largely due to the uncertainty over Omicron, although that now seems like less of a threat,” Richard Gorry, managing director at JBC Energy Asia said. Graphic: Global gasoil inventories, https://fingfx.thomsonreuters.com/gfx/ce/znvnelreqpl/Pasted%20image%201642737633617.png

(Reporting by Mohi Narayan in New Delhi, Roslan Khasawneh in Singapore, Ron Bousso in London and David Gaffen in New York; Editing by Florence Tan and Simon Cameron-Moore)