Europe gasoil cash prices, cracking margins collapse as virus catches up with market

New York — While gasoil demand in Europe has held up better than that of other refined oil products since the outbreak of coronavirus, the European gasoil complex has come under severe pressure this week, with cracking margins in the Amsterdam-Rotterdam-Antwerp hub and cash prices in the Mediterranean hitting their lowest levels on record, a trend sources have attributed to increasingly tepid demand and full storage tanks.

At the end of March, sources in the ARA oil hub said demand for gasoil at 50 ppm and 0.1% sulfur in the region remained resilient in spite of various lockdowns and travel restrictions intended to halt the spread of coronavirus.

"Demand is still there for heating oil, less so for the road fuel obviously," a barge trader said at the end of March. "Consumers trying to get product at the good prices," and were keen to buy in a contango market.

In fact, demand for gasoil was so strong in certain markets, some sources said they were blending 10 ppm ULSD down into higher sulfur gasoil grades in order to satisfy consumers, a trend that seems to be winding down now. "I think that demand for diesel to use as heating oil will quieten down," a trader said last week. "There are still a lot of deliveries to be done, notably in Belgium, which uses 10ppm diesel and 50ppm gasoil for heating buildings, but I am receiving fewer and fewer orders."

According to data from insights global, ARA gasoil and diesel inventories rose about 2% last week to reach their highest level in four weeks.

Now, sources in the ARA region say the demand picture is bleaker, more in line with market sentiment for ULSD, jet fuel and gasoline. For gasoil as well as other middle distillates in Europe, "looking at April and May, demand is just horrible," one market source said Tuesday.

This take on the market lines up with research from Platts Analytics, which shows European refineries have scaled back operations since the pandemic broke out, eating into refining margins. At the start of April, Platts Analytics said some 180,000 b/d of refining capacity in Northwest Europe had been lost due to discretionary run cuts, maintenance and planned idling of units.

It is in this context that the ARA 0.1% barge cracking margin versus front-month ICE Brent crude futures was assessed at $1.88/b on Tuesday , a $1.37/b drop on the day and the lowest level for the crack on record. Platts first began to assess the crack in January 2007.

Another source on Tuesday said that cracking margins for most oil products cannot improve until government restrictions on travel to prevent the spread of coronavirus are lifted.

Mediterranean markets under pressure

Compared to Northwest Europe, the Mediterranean gasoil market has been in an even more severe free fall since the outbreak of coronavirus. With warmer weather in the Mediterranean and less need for heating, sources have said local demand has crashed, leading to the lowest prices on record.

Based on a standing offer observed in the Platts Market on Close assessment process, Mediterranean 0.1% gasoil cargoes were assessed at $227/mt on Tuesday, down $24/mt on the day and the lowest outright price on record since the assessment began in January 2008. Put differently, Mediterranean cargoes on Tuesday were assessed at a $52/mt discount to front-month ICE low sulphur gasoil futures, another record low.

This helps explain why Mediterranean crude netbacks have been decimated since coronavirus. On Tuesday, Platts assessed the Arab Light crude cracking netback at an Italian refinery at $19.56/b, about 73% lower than a year ago.

According to Platts Analytics, while refining capacity has dropped around 180,000 b/d in Northwest Europe due to discretionary run cuts, maintenance and planned idling of units at the start of April, in the Mediterranean, he figure was estimated at about 1.819 million b/d. In effect, this means the Mediterranean accounts for more than 12% of the 14 million b/d in global refining outages observed by Platts Analytics in early April.

Looking ahead, there does not seem to be much hope that refinery cracks or gasoil cash prices will recover in April. According to the latest Oil Market Report from the International Energy Agency, "the impact of virus containment measures on global fuel demand has been severe. In March, global demand is estimated to have fallen by 10.8 million b/d year on year ... in April, the year-on-year declines have almost certainly accelerated."

Thanks to coronavirus, global gasoil and diesel fuel consumption "for 2020 will fall 2 million b/d or 7%," the report forecasts.