OIL QUARTERLY: Transportation fuels see bearish Q3 on low demand

London — Demand for transportation fuels remained muted in the third quarter amid continued coronavirus pandemic concerns and economic pressures, while refinery run cuts have provided some balance to the markets.

GASOLINE

After a strong rebound from the height of the pandemic in Q2, the gasoline crack failed to settle above $5/b during Q3, as the demand recovery lost momentum. During Q3, the crack has averaged $2.89/b, versus $8.80/b in Q3, 2019.

The premium unleaded FOB AR barge price remained rangebound in Q3, averaging $394.55/mt, up from a year-to-date low of $130.50/mt on April 21 but still way below the year-to-date high of $638/mt on Jan. 6.

The Northwest European gasoline market benefited from a strong demand recovery in domestic markets and for exports to the US and West Africa. During Q3, data intelligence company Kpler expects 19.5 million barrels of gasoline to flow from NWE to West Africa, up 143% on Q2, and 3% lower on the year.The Mediterranean gasoline market saw limited export interest during Q3, however, the market remained balanced thanks to refinery run cuts and turnarounds.

DIESEL

European diesel demand also extended its post-lockdown recovery in July, leading to a relative tightness in the cargo markets in NWE and the Mediterranean. Arbitrage routes into Europe from Asia and the US were closed, and resupply from Russia was still limited as refineries there have not fully ramped up production. It took some time for European refinery production to catch up with the demand recovery. However, as soon as that happened, the cargo markets rebalanced, helped by still high inland stocks.

Meanwhile, the diesel arbitrage form the US opened, bringing more supply to Europe and Middle Eastern flows into the region turned healthy again, while at the same time the demand recovery stalled.

At the end of Q3, ULSD consumption was oscillating at between 90% and 97% of previous year's levels in Europe depending on countries. In the UK, sales of gasoline and diesel in the week to Sept. 20 rose to 92% of pre-lockdown levels, up 1 percentage point from the previous week, while in France diesel deliveries in August were down 4.5% and gasoline sales down 0.7%.

At the end of September, increasing oversupply in the European ULSD market and the lack of inland storage in NWE prompted more cargoes onto floating storage despite questionable economics. Traders talk about 1 million mt of ULSD in floating storage. In the spring, ULSD floating storage peaked at 2 million mt due to lockdowns, but most of it was cleared in June.

Looking at prices, CIF NWE ULSD cargoes were assessed at $320/mt on Sept. 24, bringing them to a 50 cents/mt discount to the front-month ICE LSGO, while FOB ARA ULSD barges were assessed at a $5.50/mt discount to LSGO futures, pushing the physical FOB ARA ULSD barge crack versus Dated Brent to a record low of $1.42/b on Sept. 24, the lowest value since Platts records began in 2002.

JET FUEL

At the end of Q3, the CIF NWE jet fuel cargoes were still trading at a discount to front-month ICE LSGO futures, with cargoes assessed at a $8/mt discount to October futures on Sept. 24, 2020 versus a premium of $51.25/mt on Sept. 24, 2019, encapsulating the weakness of the market as long-haul travel continues to bear the brunt of the coronavirus pandemic.

Global scheduled flight capacity declined for the seventh consecutive week in in the week starting Sep. 21, slipping to 56.9 million seats, down from around 115 million seats mid-January, according to flight information provider OAG. In Western Europe, flight-seat capacity was 10.2 million in the same week, down around 45% from precoronavirus levels. In France, jet demand slumped 66.3% on year in July and 60.1% on year in August, while in the UK, jet demand plunged 75% on year in July, according to official data.

The reimposition of tighter restrictions due to the new surge in cases of coronavirus disease in many European countries led to renewed high levels of flight cancellations. While at the end of July, European airlines were relatively optimistic, planning for capacity to ramp up in Q3 and further in Q4, their hopes were dashed and scheduled capacity is now expected to drop further in the winter months.

Despite poor demand, the jet CIF NWE cargo discount to front-month ICE LSGO futures has actually narrowed in recent weeks to single-digits from a discount $31.50/mt on Aug. 20, as not only was jet production minimized at refineries, but a lot of jet was blended into diesel and refineries have been further cutting runs, with notably many Med refineries running at minimum rates.

GASOIL 0.1% AND 50 PPM

Demand for 0.1% gasoil and 50 ppm gasoil in Northwest Europe plunged in Q3 as tanks were already full following the heating oil buying spree in Q2 and warm temperatures through the end of September.

In the Amsterdam-Rotterdam-Antwerp trading hub, diesel and gasoil inventories rose 1.6% week on week to a 13-month high of 2.948 million mt as of Sept. 16, Insights Global data released Sept. 17 showed. This was due to high stocks levels, notably in Germany and Switzerland.

After jumping 129.8% on year in May and rising 7.4% on year in June, heating oil sales of 0.1% gasoil in France – one of the biggest consumer of the product in Europe – slumped 47.8% on year in July, before plunging 59.9% on year in August, official data shows.

One of the only demand outlets for 0.1% gasoil in Q3 was for blending into marine gasoil and exports to West Africa.

In the Mediterranean, the 0.1% gasoil cargo market tightened in August, pushing up physical premiums amid refinery run cuts and supportive demand from North African countries where 0.1% gasoil is used both as a road fuel and in air-conditioning units.

At the end of Q3 on Sept. 30, CIF NWE 0.1% gasoil cargoes and CIF Med 0.1% gasoil cargoes were assessed respectively at $326.75/mt and $333.25/mt, down from $612.50/mt and $616/mt on Jan. 2, 2020.

Looking ahead, sources do not expect demand for 0.1% gasoil to improve significantly until a few weeks after winter temperatures kick in and stocks start to draw.

REFINERIES

Over the course of Q3, European refiners that had halted production or extended maintenance in the wake of the coronavirus spread had largely restarted operations, with the exception of some units. Portugal's Porto, France's Feyzin, Pernis and Zeeland in the Netherlands were all back online.

However, run rates remained low, and margins, which had favored refineries at the start of the pandemic, continued to weaken, resulting in what Hellenic Petroleum called "the longest run of record low margins."

Economics deteriorated, partly as a result of accumulated stocks during high runs at the start of the pandemic, and started taking its toll, with news resurfacing on potential closures. Gunvor said it was considering the shutdown of its Antwerp plant, with Neste also exploring the potential shutdown of its smaller refinery in Finland, Naantali. Meanwhile, Total will transform its Grandpuits refinery into a bioplastics production plant.

Refinery sales, which have been shelved for several years, have once again come into the spotlight, with Total agreeing the sale of its UK Lindsey facility and Shell relaunching the sale of its Fredericia refinery in Denmark.

Sentiment remains mixed for the rest of the year amid very low cracks for oil products, with notably negative jet fuel cracks and ULSD barges Crack versus Brent still trading at record lows, which a small rise in the gasoline crack did not offset.