Diesel glut hits refiners struggling to recover from coronavirus fallout

Diesel stocks balloon. (Shutterstock)
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Updated 05 June 2020

Diesel glut hits refiners struggling to recover from coronavirus fallout

  • Dozens of tankers carrying diesel are moored off Europe’s coast as refiners in Asia, the Middle East and the US wait to find a buyer

LONDON: Brimming diesel inventories and stronger oil prices are driving down refining profits, stifling incentives to hike production even as fuel demand recovers from the coronavirus hammering.

European cracks, the profit margin for producing diesel from crude, has hit an all-time low, while cracks in the US and Asia have also plummeted.

With diesel accounting for around 50 percent of the output of an average refinery, any weakness hits refiners’ recovery plans.

Dozens of tankers carrying diesel are moored off Europe’s coast as refiners in Asia, the Middle East and the US wait to find a buyer.

“The situation looks awful,” an executive at a big European refiner said.

Consumption, particularly by airlines, is expected to take years to recover to pre-coronavirus crisis levels, pushing many refineries to continue low processing run rates, while some may need to shut down altogether, analysts said.

“This situation is not going away and will only be resolved by refinery closures,” said Robert Campbell, head of oil products at consultancy Energy Aspects.

He said that at least 1 million barrels per day (bpd), or about 1 percent of global refining capacity, would need to close.

The US refined products crack spread, a proxy for refining margins, is hovering around $9 a barrel, compared with nearly $21 at the same time last year, according to Refinitiv Eikon data.

HIGHLIGHTS

● US refining margins halved, Asian diesel cracks slashed.

● Refineries struggle to recover after demand collapse.

● Refiners to keep runs low, some plants to shut.

European diesel margins hit an all-time low of $2.9 a barrel last week, while Asian diesel cracks averaged $4.26 per barrel over Dubai crude in May, compared with an average of $15.49 a barrel for the whole of 2019.

When countries began lockdown measures, refiners boosted output of diesel, used mostly for trucks and industry, given its relative strength compared to gasoline and jet fuel, as people stopped driving their cars and airlines grounded planes.

Many refiners blended unwanted jet fuel into diesel, adding to extra supplies in the market.

In Turkey, the new STAR refinery cut jet fuel production to near zero, said Hedi Grati, a refining analyst at IHS Markit.

As a result, global diesel stocks have swelled. US distillate inventories have risen for nine weeks, reaching 174.3 million barrels in the week to May 29, the highest in a decade.

As more people world returning to their offices and start using cars, the diesel glut is weighing on refineries which now want to meet rising gasoline demand.

US refinery utilization rose to 71.3 percent last week, well below the 91 percent in the same period in 2019.

“Refineries may even have to cut back runs further to get diesel down to where it should be and there’s a big battle refiners are having between gasoline yield and distillate yield,” said Patrick DeHaan, head of petroleum analysis at tracking firm GasBuddy.

With international aviation expected to remain depressed, refiners would continue diverting jet fuel to the diesel pool, further weighing on cracks, Energy Aspect’s Campbell said.


Iranian oil in perfect storm of storage shortage, low demand, sanctions

Updated 41 min 59 sec ago

Iranian oil in perfect storm of storage shortage, low demand, sanctions

  • Coronavirus, US economic action sees inventories reach bursting point

LONDON: Iranian oil production has reached its lowest point in almost four decades, according to industry experts, with the country’s storage facilities fast approaching full capacity.

The news comes amid a dip in Iran’s oil exports due to a crash in global demand, and in a period when its refineries have been hampered as a result of the coronavirus outbreak.

With over 11,000 confirmed fatalities, Iran has suffered the worst coronavirus outbreak in the Middle East, affecting all areas of industry. 

This has created a perfect storm for the country’s vital oil sector, with what little selling ability it has further disrupted by sanctions imposed by the US in 2018 following Washington’s withdrawal from the Iran nuclear deal.

Iran’s total liquid production dropped from 3.1 million barrels per day (bpd) in March this year to 3 million bpd in June, according to FGE Energy, which predicts that the figure will drop by an additional 100,000 bpd in July.

Crude production was as low as 1.9 million bpd in June, the lowest since the beginning of the Iran-Iraq war in 1981.

Exports also fell, with estimates varying depending on source — 100,000 bpd in May according to market intelligence firm Kpler, and around 210,000 bpd according to FGE — well under 10 percent of the 2.5 million bpd Iran exported in April 2018.

Iran’s onshore crude stocks, meanwhile, hit 63 million barrels in June, having been just 15 million barrels in January, according to FGE.

Kpler said Iran averaged 66 million barrels in storage throughout June, meaning that around 85 percent of the country’s total onshore storage capacity was full.

“However, it will technically not be possible to fill tanks to 100 percent, given technical constraints at storage tanks and potential infrastructure bottlenecks,” Homayoun Falakshahi, a senior analyst at Kpler, told Reuters.

Offshore the story is much the same, with options running out fast. Iran has 54 crude oil tankers, according to valuations specialist VesselsValue, and is thought to be using around 30 ships, mainly supertankers with a maximum capacity of 2 million barrels of oil each, to store over 50 million barrels of crude and condensate.

“The exact number of Iranian vessels on floating storage is a bit of a black box as they have all turned off their AIS (tracking transponder) signals,” said a spokesman for shipping group NORDEN.

“Storage is expected to continue as we do not see these vessels being able to trade anytime soon.”

The Iranian-American Harvard analyst Dr. Majid Rafizadeh told Arab News: “Thanks to the re-imposition of sanctions against Tehran by the Trump administration, the regime seems to have suffered a significant loss of revenue.
“Iran’s oil revenues and exports have been steadily declining since President Trump pulled out of the Joint Comprehensive Plan of Action and adopted a policy of ‘maximum pressure.’

“Consequently, the flow of funds to the Iranian regime has been cut off, thwarting the Iranian leaders’ efforts to fund and sponsor Bashar Assad’s regime in Syria and various terror groups.”