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Diesel in the money again

Fuel stocks are easing and margins rising, though the rally might be short

AFTER a lengthy diesel glut on both sides of the Atlantic and pressurised margins, fundamentals have finally started to improve for the road fuel. Refiners' profits are rising again.

In Europe, the ultra-low sulphur diesel crack spread against Brent crude - the profit to be made by refiners - is now around $14 a barrel, according to pricing pricing-agency Platts. In early April it was just $8/b.

Gradual stock draws and falling supplies are behind the rise in Europe and analysts expect the trend to continue.

Profit share

Margins for producing diesel on the US Gulf Coast are also forecast to keep strengthening, averaging $11/b next year compared with $9/b in 2016.

Global diesel supplies rose by just140,000 barrels a day in Q1 2016 compared with a year earlier, says Energy Aspects, despite refinery runs jumping by nearly 1.8m b/d from a year earlier.

A large drop in diesel yields - the proportion of oil products output relative to the volume of crude processed - in China was largely responsible for the fall in supplies.

French refinery strikes in May, scheduled maintenance and stronger fuel demand in India all encouraged traders to pull diesel out of inventories.

9.245m b/d expected Asian demand by year-end

US exports of distillate fuels to Europe are also falling, and were expected to drop by 300,000 tonnes between May and June, according to the most recent data.

But stocks remain high - the result of an unusually mild winter in Europe, which lessened diesel demand. And the inventory is only now beginning to shrink.

Distillate stocks in the Amsterdam, Rotterdam and Antwerp (ARA) trading hub stood at 23.5m barrels for the week ending 17 June, or 4% more than a year earlier, according to BNP Paribas.

That's a significantly smaller overhang than at the start of the year, when diesel and gasoil stocks in ARA were almost 26% above the levels of January 2015.

Call to market

Global demand is also starting to pick up. Drought in India and southeast Asia helped boost total Asian diesel demand by 250,000 b/d this spring compared with a year earlier, according to Energy Aspects. The consultancy now expects Asian diesel demand to reach 9.245m b/d by year-end, up from 8.772m b/d between January and March.

Even in Europe - consistently oversupplied since crude prices crashed 18 months ago - demand in April was 200,000 b/d above its level a year earlier. Across the continent's five largest consumers consumption should reach 6.81m b/d in the fourth quarter, or 300,000 b/d more than at the start of the year. Growth next year will be 0.6m b/d, predicts Energy Aspects.

These forecasts were made before the UK's Brexit vote. The referendum's implications for European GDP and fuel demand are not yet clear, but analysts are expecting a change to market dynamics.

The gasoline picture is different. Since last year, refiners have been maximising gasoline production to take advantage of record-high US demand and strong margins for the road fuel.

Now cracking margins for the fuel are under pressure because stocks are bloated and refiners face a weakening of margins across the board.

Some lingering doubts will temper diesel bulls' enthusiasm though.

If refineries choose to switch yields to maximise diesel instead of gasoline output, rising supplies will soon put pressure on margins again.

Morgan Stanley, a bank, says the weakening effects of el Niño and the approach of monsoon season in southeast Asia should dampen demand this summer.

Refinery-maintenance season is also winding down, which is anticipated to increase distillate supplies. The bank expects around 4.7m b/d of refining capacity to start up again some time between May and July. 

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