Middle distillate cracks hit multi-year lows on lagging product prices

New York — Physical middle distillate cracks have been driven to multi-year lows as distillate flat prices lag behind the recent recovery in crude oil on demand destruction fears due to coronavirus, in addition to generally weak demand, according to traders.

The Platts Dated Brent crude oil benchmark rebounded to $60.22/b Thursday, from a 13-month low of $53.12/b on February 10, up 13.4%, while the physical diesel 10 ppm FOB ARA barge price was at $518.25/mt, up from $491.5/mt over the same period, up only 5.4%.

Looking at cash cracks, diesel 10 ppm FOB ARA barges versus Dated Brent fell to $9.35/b Thursday, down from $14.05/b on February 6, at its lowest level since June 2017.

Similarly, the gasoil 0.1% FOB ARA barge crack moved down to $8.15/b Thursday, from $12.15/b February 6, also at its lowest point since June 2017.

Due to the scale of demand destruction brought about by the coronavirus outbreak, the jet fuel FOB FARAG barge crack has plummeted to $7.88/b below 0.1% gasoil, its lowest point since August 2016.

January and to a lesser extent February are typically the weakest months in terms of ultra low sulfur diesel demand in Europe as people drive less and there is limited agricultural activity, but in addition unseasonably mild winter temperatures across Northwest Europe and the US Atlantic Coast have limited any boost from heating demand.

The maximum sulfur content of heating oil varies, and in Germany where 50 ppm gasoil is used, traders can buy ULSD to fill 50 ppm gasoil shorts. Similarly, 10 ppm diesel can be used to fill 15 ppm diesel shorts in the US, where many states on the East Coast use ULSD as heating oil.

Sources said that despite the European spring refinery turnaround season getting underway which is cutting some supply, there is still ample availability as demand in the region has been so poor.

"January consumption is down compared to January 2019, [for 0.1% gasoil] especially because the temperatures [in Northwest Europe] are not very cold while January 2019 was very cold," a source said.

However, ARA physical gasoil premiums have strengthened on the back of increased demand from West Africa drawing supply with end-consumers in WAF incentivized by low flat prices. Although sources said that the amount of gasoil supplies being drawn to WAF could ease if flat prices in NWE continue to stabilize.

On the flipside, the cargo market for 10 ppm diesel was seen to be firmer in both Northwest Europe and the Mediterranean on "okay" demand and a period of less resupply due to a strong East/West spread -- a gauge of the relative strength in the diesel 10 ppm markets between Asia and Europe -- up to the end of January limiting flows to Europe, and refinery turnaround season in the Middle East, according to traders.

"... and though the arbitrage from Asia seemed to be open for loading in

March, cargoes won't arrive before late March, early April," said another trader.

For jet fuel, the market continues to bear the brunt of coronavirus-related demand destruction.

The International Air Transport Association (IATA) expects global passenger demand to fall by nearly 10% in 2020 due to the coronavirus outbreak.

The coronavirus is expected to hit the Asia-Pacific aviation sector the hardest with a potential 13% full-year loss in passenger demand.

"Considering that growth for the region's airlines was forecast to be 4.8%, the net impact will be an 8.2% full-year contraction compared to 2019 demand levels," IATA said in a statement Thursday.

The demand destruction has resulted in a significantly larger amount of jet fuel cargoes in China looking for a home and therefore more product is making it's way to Northwest Europe. Further facilitating this trade flow, China loosened its export quotas at the start of 2020.

"[I] think certainly more [jet fuel] coming from China as I hear it [...] hearing significantly so," said a trader Thursday.