Spotlight: Diesel weakness is a headwind for higher runs in the Atlantic Basin

A version of this Spotlight from S&P Global Platts Analytics was first published April 21.

Diesel/jet will remain under pressure longer than gasoline due to relatively low jet demand, ample stocks and abundant potential arbitrage volumes from East of Suez. China is exporting around 700,000 b/d of diesel and India crude runs remain resilient despite the alarming increase in infection rates and risk of lockdowns.

European demand does not get back to pre-pandemic levels until late this year or early in 2022. Looking at demand compared to 2019 levels, this year will still average 3 million b/d lower than those pre-pandemic levels.

We expect the West to lead the global recovery in refinery runs, but diesel weakness remains a headwind. Diesel cracks remain weak as the supply is still receiving components from jet at the refinery level. Also, the new refineries being commissioned are designed for higher middle distillate yields.

Distillate stocks in Europe are high and the distillate balances are very long East of Suez. The potential for arbitrage from the Middle East, East Asia and US Gulf Coast should keep a lid on European diesel cracks. The diesel weakness is expressed via the contango in the front of the curve which is not wide enough to incentivize marginal storage economics, but indicative of physical length in the market.

Lastly, US refiners are pushing gasoline yields to the limit, which should help put a cap on gasoline cracks from the supply side. From the demand side, increasing cases in India, Brazil and other countries questions the ability of gasoline cracks to make fresh highs. In case gasoline cracks fail to perform, or if their upside is limited, diesel is not the product to alone carry the cracks and discretionary increase on runs could be questionable with the weight on overall margins.

Platts Analytics maintains a bullish outlook, mostly for substantial crude draws in the third quarter, but product demand, or rather a lack thereof, remains a risk to the forecast.