Benedict: Hello, and welcome to this podcast series created by the August European Products team. This is the third and final part of the series. The overall series is about the outlook for the European diesel market in 2025. Today we're going to round up the discussion by looking at domestic European production of diesel. In part one, we looked at European diesel demand, and in part two, we looked at import supply to Europe. And we're going to finish up now with domestic European production. My name is Benedict George. I'm the deputy editor of the August European Products report and I'm joined on the podcast today by our diesel market reporter in Europe, George Mayer Bonnet. Thank you for joining us, George.
George: Thanks, Benedict.
Benedict: Should we consider something that will at least to some extent tighten European diesel supply in 2025, which is going to be the closure, the long-term permanent closure of some European refining units in 2025? Specifically, we're talking about the Petroenios refinery at Grangemouth in Scotland, the Shell refinery at Vesseling in Germany on the Rhine River, and one of the crude distillation units at the BP Gelsenkirchen refinery also on the Rhine River in Germany. And between them that accounts for about 400,000 barrels per day of crude distillation capacity. And while we can't take it for granted, all of those are going to close down on the schedules that the companies have stated. You know, if margins did unexpectedly pick up really strongly, it's absolutely conceivable that those closures will be pushed back. But the expectation at the moment and the guidance from the companies is that those units are going to close down permanently in 2025. And that will take away some diesel production from the European market. So, to some extent, that will support European diesel prices. But what effect are you expecting from that, George?
George: Yeah, so I suppose we should expect the market to rebalance if it hasn't already, essentially. You know, many market participants, if not all, are already aware of these upcoming closures. I suppose the only factor that kind of remains is, you know, when are they shuttered, right? You know, with Grangemouth, it's pretty firm, you know, by the end of the second quarter. But with Vesling and Gelsenkirchen, they're pretty open-ended in some instances, right? And we heard at our crude conference itself from Kepler, who was, you know, rightly saying that if there's any indication that these refinery operators decide to delay the closure of their assets, if they're wanting to chase higher refinery margins for certain products, then that could be a source of turbulence for the market, for sure. Either the market rebalances in deeming there to be too much supply at a certain juncture, you know, next year or otherwise, right? So, there does remain some uncertainty on that front, right? But as and when...
Benedict: And for the 2025 market, it makes a massive difference, as you say, whether those refineries shut in January or shut in December. Ultimately, long-term, it's the same thing for Europe, but for 2025, it looks totally different depending when the refinery shuts down. And there may be no clarity on that until very close to the event, as you say. I mean, we may be going month to month through 2025, keeping on asking ourselves, "Is it going to shut down next week? Is it going to shut down next week?" You know, and so there's a big question mark.
George: Absolutely. And in the meantime, of course, if there's any unscheduled refinery outage, how does that impact in the meantime? Probably, you know, by distorting the market and likely supporting diesel refining margins in the meantime. And of course, you know, at what point could these events unfold if it's during peak demand? You know, then we could expect, you know, some heights there, I suppose. But yeah, I think that there could also be some others around the corner, right? You know, we're speaking to market participants who are talking of potential acquisitions or closures taking place next year as well, right, Benedict?
Benedict: Yes, absolutely. Naming no names. There's another refinery in Northwest Europe, which we happen to know is making a loss every month. And it's not the only one. I mean, there will be more than one refinery in Europe at the moment that does not have a sound financial future. Petra Ineos regarding Grangemouth has specifically said that it consistently has been making a loss. And that is not surprising, really, is it? Given that we're talking about how demand has declined locally in Europe and not only for diesel specifically, but for oil products as a whole, demand has declined.
George: Absolutely. And then...
Benedict: It's risen for some, declined for others. But overall, oil product demand has fallen in Europe over the last five years. And as we've been describing, refining capacity has kept coming online in other regions that can easily supply the European market. So, it's no surprise that some refineries are going to close down. And the question is, what's going to be the next one to close down after these ones?
George: Absolutely. And there's something, again, which is kind of systemic that refineries in Europe are facing, and that is kind of higher costs as well, right? The overheads that they're facing are disproportionately higher in Europe for several reasons, right? Firstly, there's the geopolitical environment we find ourselves in, and that's reflected in either power or gas prices, which is ultimately something that operators have to swallow if they're operating in this corner of the earth. And there's also the regulatory environment, which wrongly ensures that workers on our continent have a higher standard of living. And these are many things that other regions of the world don't have to contend with. And that can prove a competitive advantage. And ultimately could lead to further offshoring of refining infrastructure away from Europe and new sites emerging where costs are that much lower, right?
Benedict: Yeah, 100%. I mean, the exclusion of Russian gas has really heavily hit the profitability of European refineries. The refineries use a lot of natural gas for various reasons, not only to generate heat and power but also to extract hydrogen from natural gas that they then use in some of their processes, like hydro treatment and hydro-cracking, and so on. Lots of refining processes need hydrogen, and well, around half of it, as we understand, comes from natural gas. And natural gas today, if we just look at the TTF gas benchmark, is about 46, 47 euros per megawatt hour. And if we compare that against early December of 2019, it was about 15. So, it's about 46 now. It was about 15 in December 2019. So, it's about three times more expensive. That is very problematic, obviously, not only for refinery economics in Europe but for the economics of a whole host of industries. And this is partly why these heavy industries that we were talking about before are also leaving Europe and going to lower-cost environments. But George, does anyone you talk to in the diesel market sound worried about where diesel supply is going to come from after these refineries close down? Is there any note of concern, or is it like, "This is overdue? Hurry up and close already."
George: I think it's pretty neutral, right? We've already spoken to some extent in this podcast around the structural rebalancing, which is ongoing on the continent. Essentially, there's the argument that we potentially have overcapacity or spare capacity in some corners of Europe where we can do without this domestic refinery infrastructure. We don't have as much of a structural requirement to have it immediately. For all these downsides, we can rely on longer supply chains. We don't have that great a demand for diesel currently. And it also speaks to other products as well, right? When we have the likes of gasoline coming under pressure, whether it be on margins and supply. So, well, in the case of there being too much supply and downward pressure on margins, that also it gives rise to an impetus to close additional refining capacity in Europe as well.
So, this could well be something that the broader refined products market itself is having to contend with, not just in diesel, but given the dynamics across the barrel, then we arguably have excess capacity for either diesel production, and certainly in the case of gasoline, where of course Europe is net long, so i.e. it produces more gasoline than it consumes. And with the second largest market of gasoline leaving Europe up until now being West Africa, Dangote refinery adds additional pressure on European refineries, right? If they're able to domestically produce their own gasoline, which is the largest road fuel in West Africa, then there is less of an argument for keeping gasoline producing in that capacity in Europe. Yeah.
Benedict: There's spare capacity in the European refining sector right now, even though we're short of oil products overall in Europe, so we have to import more oil products than we export. There's still spare capacity because there's capacity that isn't economical to run because there's capacity that can't compete with imports basically. So, the European refining system never runs anywhere near 100% of its capacity on paper. At an absolute maximum, sometimes it gets near 90%, but there's a whole 10% chunk of European refining capacity on paper that is never used. And that's been increasingly the case in recent years as demand has declined further and as imports have become even more competitive for diesel, particularly. I think it was really interesting how our colleague who assesses jet fuel prices, he was talking to somebody in the Italian jet fuel distribution industry about these two fires that have occurred at two Eastern Mediterranean refineries, the Corinth refinery operated by Motor Oil Hellas and the Izmir refinery in Turkey operated by Tupres.
They both experienced fires in the last two or three months and they both have large units shut down now because of those fires. But this guy from the Italian jet fuel distribution industry business, he was saying it just hasn't rattled anyone. Everyone there on the ground is relaxed about supply. There's easily enough supply around despite two fires shutting down big refining units, supplies, totally relaxed. Now, I don't know that everybody in the market would have the same perspective, but it's remarkable that, that could be the tone of the conversation. It's remarkable two big units could be shut down by fires and it isn't worrying at all. At the same time as the Yass Ref refinery on the Red Sea, the Saudi Aramco-Sinopec joint venture on the Red Sea, a big refinery, 400,000 barrels a day, completely shut down for planned maintenance. At the same time as these two fires in the Eastern Mediterranean, and still people are not really concerned about supply. The traders we speak to in the Mediterranean are fairly relaxed, aren't they? So...
George: That's right. And we also have to say...
Benedict: ...they have the same capacity.
George: It does indeed. We see the same in the diesel market, obviously quite an adjacent market to jet fuel. We are essentially seeing the market calm itself after the initial prospect of this kind of supply disruption. As we say, initially from Motor Oil Hellas' current refinery, which had to shut a CDU down following a fire in September, then we had to pressurize Izmir, you know, endure the same and having to close one of its CDUs in the last couple of weeks due to a fire, as well as Gonfreville in France. Obviously, that's in North West Europe, but nevertheless, the Med came under pressure there. What calmed market participants ultimately was the arrival of particularly LR2 cargo. So, these are long-range cargoes, traditionally holding in excess of 100,000 tonnes of diesel.
And essentially they entered the Med from East of Suez. So, in these instances from the Mid-East Gulf, I believe from the United Arab Emirates. And the mere arrival of one LR2 was enough to, you know, essentially defuse both those concerns over diesel supply availability in the Med alone, okay? So, that's just pretty remarkable that how, you know, we... Yeah, so this isn't only a story about excess capacity, but, you know, the new reality and how we source our diesel is actually working for us, right? And we get a pretty steady flow. It might be, you know, down to extended supply chains, but we do eventually get large volumes of diesel, ebbing and flowing into, you know, European ports. And that really does calm markets, even if, you know, we have to wait a week or two to get it, I suppose.
Benedict: Yeah, because demand globally has not been very strong in the last year, really. We mentioned how Chinese demand was actually down year on year in some months of 2024. We've talked a lot about European demand being slow. U.S. demand has also been down against the previous five-year average, I believe, U.S. diesel demand that is. Demand has just generally been quite low and the world, you know, in total has brought on a lot of new refining capacity at the same time. So, refining capacity is up and demand is down. And naturally, that means it's quite straightforward for everybody who wants it, to get hold of the diesel that they want. And in case we sound too bearish for 2025, we should...
I mean, we've alluded to a few things that could tighten the diesel market in 2025. Of course, it's always possible that unexpected things happen. There are unknown unknowns. There could be, you know, any number of things that we have just never dreamt of could happen and prices could move totally in an unexpected way. And I think the longer that you watch a market, you know, the more that you realize whatever you think is going to happen is probably not going to happen. So, we should caveat everything we're saying with a good deal of uncertainty. And particularly, I think if we have to pick one thing that might tighten the European diesel market, that might push up European diesel prices next year. If you had to guess, what would be the one thing most likely to push up European diesel prices next year?
George: Oh, that's a tough one. I'd say, you know, given the kind of direction of the wind on this one, I think any unexpected or sudden refinery closure announcement, which either takes effect, you know, immediately or in the months following that. I think that's most likely, given the conversations we've had today, you know, refiners continue to be under pressure, right? And it's not unexpected for these things to happen. We know of and have reported on a fair few refinery outages where in the case of Corinth, we were expecting maintenance for up to a year until one certain crew distillation unit is able to be brought back online.
Benedict: A year from now, we could be looking back at 2025 and talking about how 6 big refineries had unexpected units shut down. That's unlikely, but it's possible. It could happen. You know, we've talked about how you alluded to the, we had the Total Energies shutdown of the crew distillation unit in France and the one in Greece and the one in Turkey. So, there've been three in just the last two months. I mean, at that rate, in three months, that's a lot of capacity shut down over a whole year. And the rate could increase. That a lot of these assets are very old. A lot of them, because there are question marks over the long-term future of some of these assets, they don't always receive as much maintenance investment as would be ideal for the smooth operation of the machinery. So, we do see a lot of unplanned shutdowns for refinery units in Europe.
And if there are a lot of those next year, it could tighten things. I think that's all we've got time for today. But thank you so much for joining us, George. And I suppose in conclusion, we can say that although European diesel production will be cut in 2025, we know it will be cut. Europe will nevertheless be producing the diesel that it needs to complement import supply. This has been the third and final part of a three-part podcast series. So, today we looked at domestic European production of diesel. In part one, we looked at domestic European diesel demand, and in part two, European diesel import supply, looking ahead at the outlook for 2025. So, if you're interested in those other aspects of this story, do keep an eye out for those.