Europe's refiners have begun ramping up crude runs as the spring maintenance season passes its peak, allowing them to take advantage of strong gasoline margins. But the diesel market is struggling to absorb the increased supply.
Demand for road fuels in Europe is being supported by the easing of lockdowns in some countries and expectations that restrictions will be relaxed further in the coming weeks. But gasoline margins are faring better than diesel, and cashing in on the lighter product's gains risks depressing diesel cracks further. Benchmark Eurobob oxy grade gasoline barges have averaged a $10.34/bl premium to North Sea Dated crude since the start of April, more than double the first-quarter average of $4.64/bl. The rise has been supported by the switch to summer-specification product at the end of March, which requires more costly blendstocks to meet evaporability requirements.
Fundamentals are playing a role too, with the relatively sprightly US economy pulling high volumes of gasoline out of Europe. Westbound transatlantic gasoline exports hit a near two-year high in March, underpinned by refinery disruptions in the US. Exports fell back somewhat last month but were still double the same period last year, albeit down 25pc on pre-pandemic levels in April 2019. The combination of robust transatlantic exports and a sharp reduction in European refining capacity — through permanent shutdowns and economic run cuts — has left gasoline margins roughly double diesel margins in recent weeks, a rare occurrence in pre-pandemic times given Europe's structural diesel shortage and gasoline surplus.
Northwest European diesel cargo premiums to Dated have averaged just $6.02/bl since the start of April. Typical complex refinery operating costs are around $5-6/bl, which means some refiners may be struggling to break even on diesel. The spread between gasoline and diesel margins has narrowed slightly in recent days, with gasoline's premium to Dated priced at $8.20/bl on 14 May, the lowest since the switch to summer-grade fuel, while diesel's premium touched $6.87/bl on 12 May. But a sustained recovery in diesel will likely require a revival of global industrial activity and a recovery in jet fuel demand in order to use up stocks from the middle distillate pool.
European diesel prices have been under intense pressure since the start of the pandemic. Recurring restrictions on travel and business activity have weighed on demand, and this has been compounded by surplus jet fuel being added to the diesel pool amid the collapse in air travel demand. Jet can be blended into diesel but not into gasoline. In addition, cheap freight costs on the route from east of Suez along with rising refinery output in Saudi Arabia led to an influx of diesel into Europe from the Middle East and Asia-Pacific this spring. And market participants say diesel stocks in Europe are still relatively high.
Rising runs
Refiners in the EU-15 plus Norway operated at around 72.5pc of their nameplate capacity in April, based on preliminary Euroilstock data and Argus research, up from 70.2pc in March. Germany led the increase with a roughly 10pc month-on-month rise. The country's largest refinery, Miro's 301,000 b/d Karlsruhe plant, hit a utilisation rate of around 83pc last month and is expected to reach full capacity this month. Refining activity in Europe is also being boosted by the return of major refineries from maintenance. ExxonMobil's 270,000 b/d Fawley refinery in the UK restarted in April after around three months of maintenance work and Grupa Lotos' 210,000 b/d Gdansk refinery in Poland is now fully back online after around two months of downtime.
Some fresh maintenance is scheduled in Germany. BP is beginning a partial shutdown at its 265,000 b/d Gelsenkirchen refinery in western Germany this week and Total has started a six-week shutdown of its 210,000 b/d Leuna refinery in southern Germany. But the peak of the maintenance season has passed and those shutdowns are being matched by restarts.
