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Diesel demand heading east

As Europeans are falling out of love with diesel, market share elsewhere will keep rising

Over the next 25 years demand for what is now the region’s favourite road fuel will fall as sluggish oil consumption in the rich world, environmental concerns and a shift towards gasoline use in light-duty passenger vehicles all curb consumption.

Last year, oil demand in OECD nations got a temporary boost, as lower prices encouraged stock building and crude consumption increased. But by the fourth quarter of 2015 the longer-term trend was back in play: demand for crude in these countries fell by around 375,000 b/d compared with the previous quarter.

That was a marked drop. Over the previous five years, rich nations posted quarter-on-quarter demand growth of around 190,000 barrels a day, according to the International Energy Agency (IEA).  

The organisation said the drop was driven by falling gasoil and diesel demand, which was not helped by a warmer than average winter and sluggish macroeconomic growth.

Things aren’t going to improve much soon. The IEA expects total OECD oil demand in 2016 to remain similar to last year’s levels, at around 46.2m b/d, with consumption for gasoline, jet fuel and heating oil all flat-lining. 

Among Europe’s five biggest oil-product consumers – Germany, the UK, France, Italy and Spain – a slowdown in diesel-demand growth has already begun. In December total OECD Europe’s diesel demand was just 0.7% higher than a year earlier, reaching 4.59m b/d, according to the IEA. That’s down from year-on-year growth of around 4% across the five nations in March last year. And this year Europe will consume around 6.7m b/d of combined diesel and gasoil, according to Vienna-based consultancy JBC Energy. This will increase by an anaemic 15,000 b/d every year, between now and 2020. 

None of this is going to help the global diesel glut that has accumulated over the past year, when US and European refiners took advantage of stellar refining margins and maximised production of the road fuel. 

But it’s not all bad news for diesel. Demand will continue to rise in the heavy-duty trucking and freight sectors, especially in Asia. Indeed, total global oil demand in the transport sector will grow by around 11m b/d between now and 2040, with road transport accounting for 60% of the increase.

ExxonMobil says that over the next 25 years the oil-product mix in the global transport sector will shift “significantly towards diesel”, driven largely by strong growth in commercial transportation and relatively flat gasoline demand. 

Globally, diesel already meets about 35% of fuel demand in the transportation sector; and this will rise to 40%. Heavy-duty truckers, which already account for 80% of global diesel use, will be the fuel’s thirstiest customers.

Whatever the experience in Europe, this global shift to diesel will come at the expense of gasoline, which will lose its dominant position in the transport sector, says the IEA. Consumption will reach a plateau at less than 24m b/d in the 2030s – an increase of just 1m b/d from 2014 levels. Any increase in non-OECD gasoline demand will be largely offset by the decline in the rich world. 

By contrast, diesel demand in transport will increase much more rapidly, surging by 5.7m b/d over the period to almost 24m b/d in 2040. Outside transport, diesel consumption will fall by 2.1m b/d.

Opec, which has long pinned its hopes around ever-rising demand for its products, is even more bullish. It expects combined diesel and gasoil demand will rise by around 8m b/d between now and 2040, reaching around 35m b/d. Global gasoline consumption won’t rise as aggressively, but will still increase by 3.7m b/d between now and 2040, hitting about 26m b/d.

Some sectors will perform better than others. The marine segment could help to boost European diesel demand around 2020 when more stringent fuel-emissions regulations from the International Maritime Organisation (IMO) come into force. These will demand greater use of low-sulphur diesel fuels, eroding some demand for fuel oil.

But a fall in diesel use in light-duty vehicles will offset some of this growth, as consumers return to gasoline cars and hybrid-gasoline units start to make their mark. Diesel and gasoil refiners should thank the IMO for small blessings. Michael Dei-Michei, an analyst at JBC Energy, reckons that without the new regulations demand for their fuels would decline by 25,000 b/d between now and 2020. 

Even so, in the decade after 2020, European diesel demand will fall by around 90,000 b/d every year, Dei-Michei says, largely because the size of the continent’s car fleet will stagnate. He expects flat demand for gasoil and diesel this year and next before a slow fall until 2040. 

“In Europe the decline in diesel will be driven by the fact that it is the main fuel in the private-car fleet,” he says, which will stop growing in 2018.

Other forecasters are similarly bearish. IHS, a consultancy, expects diesel use in light-duty vehicles (under six tonnes in weight) to fall globally over the next decade, with the biggest drop coming from the EU. Diesel-engine sales account for more than half of the total now, but this will drop to 38% by 2028, it says. In Europe, gasoline cars will overtake diesel around 2018-19.

Retail rights

Europe’s declining diesel demand could also be a big problem for some of the continent’s largest car manufacturers, especially following the Volkswagen emissions scandal, which was exposed last year.

The German car manufacturer admitted last October that it had cheated on NOX and particulate-emissions tests. November saw a second scandal hit the company, when it acknowledged that CO2 emissions and fuel-economy figures were incorrect for 0.8m vehicles.

The scandal may have some impact on long-term diesel demand in Europe and the US but it’s not yet clear to what extent. What is clear is that it has raised new questions about the impact of emissions from diesel engines on air quality and reignited debate about the tax advantages diesel has enjoyed in Europe over gasoline, which has helped to boost consumption of the distillate fuel over the past decade.

Energy consultancy Wood Mackenzie estimates that if EU governments removed the retail tax discount on diesel, around 15% of the bloc’s drivers would switch to using gasoline. 

The consultancy says if this was reflected in new-car sales, the number of diesel cars in the EU fleet would fall from almost 100m now to 61m by 2035, while the number of gasoline cars would rise from 135m to almost 167m.

As a result, there would be a near 16m-tonne fall in European diesel demand by 2035, according to Wood Mackenzie, while gasoline demand would be almost 17m tonnes higher.

One problem with diesel, says Pavan Potluri, an analyst at IHS Automotive, is the tightening of emissions standards. These increase engine costs, “which cannot be passed on to the customers in price-sensitive segments”. Customers will eschew these emissions-belchers, preferring more efficient vehicles. Not everyone agrees. The IEA thinks diesel’s use in the light-duty segment will still rise until 2040, just more slowly than gasoline’s. 

It leaves a mixed picture for Europe’s processing sector. Falling diesel demand in passenger vehicles could bring some short-term relief to the continent’s refiners, by easing their dependence on the fuel to support refinery margins – and providing a regional demand boost for part of Europe’s excess gasoline production. Nonetheless, European refiners with facilities configured to maximise diesel production are in for a tough time, especially as output ramps up from the Middle East and China, adding competition for buyers.

One of China’s biggest refiners, state-owned CNPC, said in January that the country’s total net exports of oil products would increase by 31% this year, reaching 25m tonnes (197.5m barrels). This follows a 75% rise in Chinese diesel exports last year and will put pressure on margins for other Asian refiners in an already-oversupplied diesel market. Expected capacity increases over the next five years in the Middle East will also push down margins around the world.

Despite the gloomy outlook for European diesel demand, consumption in the US and Asia offers refiners some cheer. JBC Energy expects American diesel consumption, now at around 4m b/d, to grow by around 14,000 b/d, every year, over the next five years. Between 2020 and 2030 that growth rate will slow, falling to around 7,000 b/d each year over that decade. 

The segments will differ. IHS says North America won’t see much growth in diesel-fuelled passenger cars but light-duty pickup trucks will provide the bulk of extra consumption. JBC’s Dei-Michei says that in the US the growing need to transport goods will offset policies pushing cleaner-burning fuels, such as a switch to using natural gas in the transport fleet. 

Future uncertainty

For diesel vendors, it will be Asia’s performance in the next 25 years that will drive demand growth. The region’s demand for that fuel and gasoil, now around 9m b/d, will increase by 125,000 b/d each year over the next five, according to JBC Energy. In the following decade, the pace of growth will increase to 150,000 b/d every year.

“All the oil-product demand growth (to 2040) will happen in Asia,” says Keisuke Sadamori, the IEA’s director of energy markets and security. “The increase in other regions like the Middle East or Africa will be cancelled out by the OECD’s decline so overall the Asian demand growth is almost equal to the global demand growth.”

But even in Asia, the signals are mixed. China, the stalwart of energy-demand rises for the past decade, is slowing. Fu Chengyu, chairman of state-owned Sinopec, said in a company conference call last year that the country’s diesel demand will peak in 2016 as gasoline use rises and diesel-chugging industrial output stalls. In the passenger-car segment, pollution concerns mean there are “no prospects” for growth, says IHS.

India, though, is another story altogether. Thanks to fuel subsidies that were in place until 2014, the country’s transport system is already heavily dominated by diesel. It accounted for 1m b/d of the country’s oil use in transport in 2013, or around 70% of the total. In India’s road transport sector, around 60% of freight vehicles and 35% of buses use diesel. It also accounts for around two-thirds of energy consumption in the country’s rail sector.

In September, India’s diesel consumption reached a 10-year high of 5.89m tonnes (or 46.53m barrels) – and it will keep rising. By 2040, the IEA says, Indian diesel demand will reach 3.5m b/d, up from 1.4m b/d in 2014. 

Gasoline consumption, by contrast, will reach 1.9m b/d by the same time, up from around 400,000 b/d in 2014. The country’s total oil-product demand is expected to reach 9.8m b/d by then, compared with 3.8m b/d in 2014. 

What is becoming especially clear, though, is the growing dichotomy in demand patterns between the richer countries and developing ones. Between now and 2040, non-OECD, or developing, countries are likely to account for all of the increase in global energy use. 

As global energy demand is set to grow by a third between now and 2040, India alone will account for a quarter of this growth and will take China’s place to become the driving force for energy demand over the next 25 years. 

As energy use essentially flatlines in much of Europe, Japan, South Korea and North America, eastern buyers will take up this slack, and India’s oil demand in particular will soar as its population swells and many more people are given access to electricity.

By 2020 India is expected to be the world’s largest coal importer, overtaking Japan, the EU and China. Its oil production will lag behind the growth in its demand – expected to reach around 10m b/d by 2040 – pushing oil-import dependence above 90% by then.

In short, global diesel demand is shifting east. The fuel will be key to powering India’s transformation into an industrial powerhouse. Refiners will need to adjust to the world’s new and shifting pattern of consumption. 

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