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.


Analysts urge Canada to focus on boosting the economy

Updated 06 July 2020

Analysts urge Canada to focus on boosting the economy

  • Canada lost one of its coveted triple-A ratings in June when Fitch downgraded it for the first time

TORONTO: Canada should focus on boosting economic growth after getting pummeled by the COVID-19 crisis, analysts say, even as concerns about the sustainability of its debt are growing, with Fitch downgrading the nation’s rating just over a week ago.

Canadian Finance Minister Bill Morneau will deliver a “fiscal snapshot” on Wednesday that will outline the current balance sheet and may give an idea of the money the government is setting aside for the future.

As the economy recovers, some fiscal support measures, which are expected to boost the budget deficit sharply, could be wound down and replaced by incentives meant to get people back to work and measures to boost economic growth, economists said.

“The only solution to these large deficits is growth, so we need a transition to a pro-growth agenda,” said Craig Wright, chief economist at Royal Bank of Canada. The IMF expects Canada’s economy to contract by 8.4 percent this year. Ottawa is already rolling out more than C$150 billion in direct economic aid, including payments to workers impacted by COVID-19.

Further stimulus measures could include a green growth strategy, as well as spending on infrastructure, including smart infrastructure, economists said. Smart infrastructure makes use of digital technology.

“We have to make sure that government spending is calibrated to the economy of the future rather than the economy of the past,” Wright said.

Canada lost one of its coveted triple-A ratings in June when Fitch downgraded it for the first time, citing the billions of dollars in emergency aid Ottawa has spent to help bridge the downturn caused by COVID-19 shutdowns.

Standard & Poor’s, Moody’s and DBRS still give Canadian debt the highest rating. At DBRS, Michael Heydt, the lead sovereign analyst on Canada, says his concern is about potential structural damage to the economy if the slowdown lingers too long.

Fiscal policymakers “need to be confident that there is a recovery underway before they start talking about (debt) consolidation,” Heydt said.

Fitch expects Canada’s total government debt will rise to 115.1 percent of GDP in 2020 from 88.3 percent in 2019.

Royce Mendes, a senior economist at CIBC Capital Markets, said the economy still needs more support.

“Turning too quickly toward austerity would be a clear mistake,” he said.