European diesel margins are likely to remain relatively low in the coming months as demand continues to face headwinds, but new marine fuel regulations offer some chance of support depending on how the shipping industry adapts.
The International Maritime Organisation (IMO) regulation to limit sulphur content in marine fuels to 0.5pc could lead to a rise in demand for gasoil-based fuel, although this is looking less certain with 0.5pc very-low-sulphur fuel oil likely to be favoured over marine gasoil (MGO). As this became apparent, northwest European diesel cargoes fell from a $20.26/bl margin to North Sea Dated crude in mid-October to less than $14/bl by the end of November, a process aided by rising crude prices.
The most likely support for diesel margins in the early months of 2020 will be if the shipping industry turns back towards gasoil. Overall European gasoil demand has been in decline for most of 2019, when the continent experienced a slowdown in industrial activity. The IHS Markit manufacturing purchasing managers' index (PMI) has been below 50 — signalling contraction — since February, and demand appears likely to remain weak for at least the first quarter of 2020.
Consumer sentiment is likely to turn even more sharply against diesel-fuelled vehicles as environmental concerns persist. Diesel models accounted for only 26pc of Europe's overall car sales in the first 10 months of 2019, down from 32pc in the same period of the previous year, according to the European automobile manufacturers' association. Europe's overall car sales fell by 0.7pc in the same period. EU legislation on use of renewable fuels will again eat into diesel demand in 2020.
Diesel production in Europe will probably be strong in the first quarter of 2020 after several of the continent's largest refineries completed maintenance work in the final months of 2019, although some outages will remain: a fire at Total's 240,000 b/d Gonfreville refinery in France in December will keep the plant's only crude distillation unit (CDU) offline for months.
Gasoil imports to Europe appear ample as 2020 begins. India has displaced the US as Europe's third-largest gasoil supplier after Russia and Saudi Arabia. Around 8.5mn t of Indian-origin gasoil arrived at ports in the Mediterranean, northwest Europe and the Baltic states in the first 11 months of 2019, up from 6.6mn t in the same period of the previous year, according to oil analytics firm Vortexa.
Imports from the US fell to 8.1mn t from 8.4mn t, as Brazil positioned itself to produce IMO-compliant marine fuels and pulled in higher volumes of US diesel as a result. Europe's imports of US diesel grew as 2019 drew to a close: US diesel stocks swelled and refinery outages temporarily lifted European prices. Flows on the route could rise in 2020 if IMO 2020 supports European prices relative to those in the US.
But imports from India could recede in early 2020, as the monsoon season comes to an end and the country's car sales show signs of recovering. India began to export sharply higher volumes of diesel as domestic demand for the product fell in every month from August to October. Demand grew by just 1pc on the year in the first 10 months of 2019, compared with 9pc a year earlier.
Russia will remain Europe's biggest source of gasoil in 2020. It comfortably retained that position in the first 11 months of 2019 when it was the origin of nearly 47pc of the continent's imports. Saudi Arabia, the second largest supplier, contributed around 18pc. Two major Saudi refineries — the 460,000 b/d Satorp Jubail and 400,000 b/d Yasref Yanbu — will undergo major turnarounds in the first quarter of 2020, which could temporarily disrupt product exports.
By Benedict George
