European refineries are ramping up runs to take advantage of the highest diesel margins since Argus began collecting the data over 30 years ago.
Although some refineries in the region, such as ExxonMobil's 310,000 b/d Antwerp facility, remain shut for spring maintenance, others are now operating at capacity or close to it, according to traders. Moreover, capacity that has been idled for months is returning, with TotalEnergies in the process of restarting its 222,000 b/d Donges refinery in France after a 17-month shutdown.
"All our refineries will be run at full capacity for the second quarter very soon," TotalEnergies' chief executive Patrick Pouyanne said in an earnings call yesterday.
The scramble to increase throughput is underpinned by higher refining margins, notably for diesel. Diesel crack spreads to crude have hit record highs in recent weeks as uncertainty over Russian supply deepens. Russia typically supplies 50-60pc of Europe's diesel imports, or around 10pc of the continent's diesel consumption. But support for an EU-wide ban on Russian oil imports is gathering momentum as the bloc looks to exert more pressure on Moscow over the war in Ukraine, and in the meantime many buyers in the region are pre-empting potential future sanctions by seeking alternatives.
French diesel cargo values have averaged a premium of around $45/bl to the North Sea Dated crude benchmark in April, according to Argus assessments. Premiums for the month peaked at $56.29/bl on 27 April, almost matching the record of $61.79/bl from early March. The previous record was $48.12/bl in May 2008, when Europe was transitioning to a 10ppm sulphur diesel specification. The premium averaged just under $16/bl in 2019, the last year before the pandemic threw oil markets into disarray.
European refineries are sensitive to diesel cracks because they are geared to produce more diesel than any other product. Diesel made up 30pc of Germany's refinery yield in 2021, compared with 18pc gasoline, according to export control authority Bafa. In Spain, diesel and other gasoil's share of refinery output was around 42pc last year, compared with 17pc gasoline, according to data from the national oil reserve corporation Cores.
Slow to react
Europe's refineries have been slow to react to the strong margins. Euroilstock data showed a drop in crude throughput in the EU-15 and Norway in March, even though the rally in diesel cracks was well underway. Besides the impact of spring maintenance, traders point out that refiners book their crude deliveries weeks or months in advance, and logistical constraints may have delayed their response. They are also wary of margin volatility, because every adjustment in their production process is itself costly.
The pace of crude imports to Europe has quickened this month, with volumes arriving at the region's ports rising by around 240,000 b/d compared with March to 10.42mn b/d, Vortexa data show. It is possible that refineries are also drawing crude out of storage to increase throughput, as the current backwardation in the crude market leaves little incentive for traders to hold stocks.
Many European refineries are refusing to buy Russian crude in spot markets, forcing them to find alternatives, which is not straightforward. The IEA notes that Russian Urals typically makes up around 20pc of refinery feedstock in Europe's OECD economies and some refineries are specifically geared to process it.
European refiners are also grappling with a lack of available vacuum gasoil (VGO). High-sulphur VGO is the intermediate feedstock used in hydrocracking units, which are key to refiners maximising their diesel yields. Europe is net short of VGO and heavily reliant on Russian imports, but many of the region's major buyers are now shunning Russian VGO and alternative sources of supply are extremely scarce.
