Diesel cracks outperform amid expectations of lower global gasoline demand

London — The coronavirus pandemic, which has hit demand for road fuel in China and will impact Europe and the US in coming weeks, has led to quite different reactions in diesel and gasoline cracks amid the plunge in crude futures.

The front-month European gasoline crack -- the product's price relative to the crude oil from which it is made -- tumbled $7/b on Thursday, S&P Global Platts data showed, to hit record summer-grade lows as those global demand fears made themselves evident, sources said.

Meanwhile, the front-month FOB AR Eurobob crack was assessed by S&P Global Platts at minus $1.50/b Thursday, down from $5.50/b Wednesday.

In contrast, the European diesel crack has seen support in the past week, with fresh spot demand supporting the physical cargo market. The deepening contango has prompted storage buying and demand for the road fuel in Europe not yet impacted by coronavirus-linked travel restrictions, according to traders.

The front-month FOB ARA ultra low sulfur barge crack slipped to $10.67/b Thursday from a one-month high of $12.53/b Wednesday.

On February 27, the front-month FOB ARA ULSD barge crack hit a 2-1/2 low of $8.34/b due to expectations of greater supply from Asia.

The relationship between diesel and gasoline is always closely followed, with the spread commonly known as the widow-maker due to its extreme volatility.

"The volatility is massive," a source said.

Historically, gasoline sees buoyant demand through summer months, supported by North American interest through the busy driving season.

The underlying value of gasoline is also typically higher in the summer months, with the more stringent specification resulting in higher blending costs. The opposite is the case for diesel, which has its more costly specifications in winter months. That leads to refineries looking to maximize gasoline production over diesel in summer.

However, with the summer gasoline needs from key petrol demand centers, the US and China, refiners are in an unusual position for the season.

Also, despite diesel currently supporting refinery margins, there were concerns further along the curve.

"I think [demand destruction for diesel] will happen in Europe and it is probably happening now in Italy. But the impact has not yet been seen on the product side as people booked their cargoes in advance," a trader said.

According to another trader, the deepening contango in the diesel paper market has prompted storage demand, which was supporting the spot market.

"There is a lot of contango demand, people see the contango and want to buy. It really makes sense at the moment. That is why we have a discrepancy between the paper market cheap and physical market," he said.

"For the moment we have not seen any drop in domestic demand in Europe but that is bound to come as the epidemics spreads...a lot of contango storage will happen for diesel and if European demand is really hit then we will see floating storage, probably for jet fuel first and also diesel," the trader said.

In ICE low sulfur gasoil futures, the April/May spread was in a contango of $3.25/mt at the London close Thursday, down from a $1.75/mt contango at the same time Wednesday, while the May/June spread was trading in a $5.50/mt contango, down from a $3.00/mt contango.