Market Trends

Diesel Profits Diminish as Supply Exceeds Demand, Shifting Refinery Focus

In a recent shift within the oil industry, the profits derived from refining diesel have witnessed a significant decrease as a result of an overabundance in supply, which has not been matched by an equivalent demand for this widely-used industrial and transport fuel.

The warmer-than-expected winter that graced the Northern Hemisphere has left the stockpiles of diesel higher than usual. Furthermore, the demand from industrial sectors has remained lackluster. Compounding the situation is China—long a colossal consumer of diesel—where there has been an upward trend in the adoption of trucks powered by liquefied natural gas (LNG), signaling what might be the early stages of a considerable structural evolution in fuel consumption patterns.

Plummeting Refining Margins

The change in fortunes for diesel is starkly highlighted by the plunge in Asian refining margins, which have seen a fall from nearly $29 per barrel in the early stages of February to approximately $15. This not only marks a nadir within a span of one year but is also reflected in similar trends in the United States and Europe, albeit with a modest rebound in recent weeks.

Current circumstances have led certain refineries in Europe and Asia to contemplate cuts in their diesel production, focusing instead on other fuels such as gasoline and jet fuel—sectors that are poising for growth. During a recent earnings call, Brian Mandell, the Executive Vice President for Marketing and Commercial at Phillips 66, commented on this strategic shift in the refining industry, maintaining an overall positive outlook due to the expected increase in gasoline demand during the summer driving season and the continuous improvement in jet fuel consumption.

From Crisis to Surplus

The present diesel dilemma is a far cry from the scenario a few years earlier, where diesel prices were inflated due to concerns over supply disruptions. Factors such as Russia's incursion into Ukraine had sent shockwaves through the market. Although recent drone attacks on Russian refineries have hinted at potential threats to diesel production, these incidents have been dwarfed by the broader supply-demand imbalance that the market currently faces.

Experts like Eugene Lindell, head of refined products at FGE, have observed that the overflow of US diesel into Europe, coupled with declining freight rates, has facilitated more affordable imports from Asia, thus influencing the European market. Although wider production cuts loomed on the horizon, Lindell notes that the situation has been somewhat alleviated by rising profits from other petroleum products like fuel oil and naphtha, which have balanced out the margin compression.

China's Shifting Fleet

In China, the diesel equation appears more complex due to the surge in LNG-powered truck sales. Emulating the rapid adoption seen previously with electric vehicles, heavy-duty LNG trucks have claimed as much as 30% of the vehicle market share in China. This shift is significant because it points to a potential decrease in diesel reliance for the world's largest oil importer.

An analysis by Goldman Sachs Group Inc. suggests that the growing fleet of LNG-powered trucks in China is effectively displacing the need for diesel. The amount of reduced diesel dependency correlates to roughly 800,000 barrels a day. This phenomenon is bolstered by a bear market in natural gas, which has dragged Asian LNG prices well below regional diesel costs, creating a more favorable environment for natural gas use over diesel.

Notwithstanding the advanced global supply of diesel, a considerable amount of the current demand weakness can be traced back to China. Overproduction in the previous year has left the market with a surplus that continues to exert pressure on diesel's value.

A Changing Refinery Landscape

The diesel market is also being reconfigured due to the ramp-up of diesel-production capacity in refineries located in Asia and the Middle East. According to Goldman Sachs, refining throughput in Organisation for Economic Cooperation and Development (OECD) countries has jumped by 400,000 barrels a day compared to the previous year's first quarter.

Consequently, refining facilities with higher diesel yields—chiefly in Europe and Asia—are facing the brunt of the downturn. Alan Gelder, vice president of refining, chemicals, and oil markets at Wood Mackenzie, remarked that the dip in diesel margins took industry players by surprise, given that diesel is traditionally seen as a consistently strong performer in the fuel mix.

Future Implications and Strategic Shifts

The global refining landscape is adjusting to these new realities. Refiners are recalibrating their output, placing emphasis on more profitable fuels and seeking ways to diversify their production profiles. As the market dynamics continue to evolve, particularly with the introduction of sustainable and alternative energy sources, the diesel market may likely face more profound changes in the foreseeable future.

For further details and the complete report on the diesel industry's current state, please refer to the original article on Bloomberg.

©2024 Bloomberg L.P. The information provided offers a deep dive into the ongoing transitions in the diesel market and the wider implications for energy consumption worldwide. As we move to more sustainable and environmentally friendly fuel options, it is evident that the reverberations of these changes will be observed across the globe, signaling an era of energy transformation.