European diesel has touched its highest ever premiums against crude, jet fuel and gasoline in the past 10 days, as well as diverging wildly from the trend in natural gas prices.
Argus assessed non-Russian diesel cargoes at a $77.07/bl premium to North Sea Dated crude on 18 October, which meant a $53.45/bl premium over Eurobob gasoline barges. And six days later, diesel cargoes reached a $29.53/bl premium over jet fuel cargoes. These were the widest premiums Argus has ever assessed in each respect.
Prompt diesel supply has been squeezed by strikes that temporarily shut down most French refineries. US Atlantic coast diesel inventories have fallen to their lowest ever for this time of year as prices made European barrels less accessible, meaning US buyers have eventually resigned themselves to paying whatever necessary to draw European shipments, making European markets even tighter. European diesel traders are also anticipating that diesel supply will soon tighten even further as EU sanctions shut out Russian imports from February.
High diesel refining margins tend to depress gasoline refining margins, because they incentivise refiners to increase crude throughput, which increases gasoline production. All else being equal, the margins push away from each other. Over the summer, European refiners hiked crude throughputs to around 88pc of their capacity, to judge by IEA data and Argus research. They were processing nearly 1mn b/d more crude than a year ago and only 700,000 b/d less than in the same month of 2019.
European gasoline prices are tied closely to US demand, as European refiners usually export more than 1.5mn t of gasoline a month to the US during the summer. But this year, volumes fell short of last year and even further below pre-pandemic levels, as high retail prices suppressed consumption in the US. Additionally, the breakdown of trade with Russia is not supporting gasoline values, because Europe does not import significant volumes of gasoline from Russia.
The divergence of diesel and jet fuel values is more unusual because refiners can easily blend those products into the other, meaning high diesel margins usually pull jet fuel margins higher. When diesel is more expensive, refiners blend as much jet fuel as possible into it, reducing jet fuel production. This is why the diesel-jet spread is far narrower than the diesel-gasoline spread, even at its record.
But blending jet into diesel is only possible within the constraints of regulated diesel specifications, in particular its density and related properties. Too much jet fuel makes the diesel too light. The dislocation of diesel and jet fuel values in October may be a signal that refiners have hit that wall.
Jet fuel demand has also dropped away seasonally after the summer holiday season, leaving more of the product surplus to requirements. Market participants said there has been a strong flow of jet fuel into Europe from east of Suez in recent weeks.
While soaring above other clean products, diesel values also diverged wildly from natural gas in the past few weeks. The TTF day-ahead natural gas benchmark roughly halved between late September and late October, while diesel refining margins climbed by more than 50pc.
High natural gas costs have contributed importantly to tight diesel supply since last year because diesel production is especially reliant on hydrogen extracted from natural gas.
But relatively warm weather for the time of year and slowing industrial demand have taken a lot of pressure off prompt natural gas supply in recent weeks, together with higher than usual sendout of liquefied natural gas (LNG) at terminals across the EU and UK, allowing inventories to recover. But the situation could change very quickly once the weather gets colder and inventories start to be drawn down to meet heating demand, given the continued restriction of Russian supply.
