Commodities 2021: European transportation fuels face uneven road to recovery

London — Demand for transportation fuels in Europe should increase as coronavirus vaccines boost road use during 2021, but a lack of clarity on the mass rollout means market participants will likely continue to negotiate smaller volumes for next year's term contracts for now.

Demand seen rising in late 2021

After a strong recovery in the summer, demand for diesel and gasoline retreated in November, with consumption falling 10%-35% year on year depending on country and the strictness of the second round of coronavirus restrictions. Even if lockdowns are lifted or some restrictions are eased before Christmas, many rules limiting contact and mobility in Europe's largest economies will stay in place until at least mid-January.

Traders predict road fuel demand will remain weak until at least the end of the first quarter or even the end of the second, with mass vaccine rollouts unlikely to happen before summer.

"Demand will probably be higher than this year, but on the lower side, mostly first-quarter weakness, maybe first half, depending on vaccines," a UK-based diesel trader told S&P Global Platts. "We expect a decent second half to 2021 for diesel."

Looking at exports, demand for gasoline and higher sulfur grades of gasoil used as road fuels in North and West Africa is thought to remain healthy, notably into Nigeria which imports around 1 million mt gasoline monthly.

The aviation sector is pinning its hopes on the vaccines after the industry and by extension the jet fuel market got hammered in 2020, with seat capacity in Western Europe still down 64% for the week starting Dec. 14 compared with last January. Not only are immunizations expected to enable governments to ease travel restrictions, but air cargo will be crucial in distributing the vaccine around the world. Nevertheless, industry experts don't expect the sector to recover fully until 2024.

Pre-pandemic travel habits unlikely to return

From the revival of domestic holidays to the comfort of working from home, COVID-19 has induced many changes to daily life, some of which will outlast the pandemic.

Remote working -- made possible for most office jobs thanks to new technologies -- is expected to become a permanent feature in some shape or form, limiting commuting needs.

A proportion of business travel will be permanently replaced by virtual meetings, market experts believe. According to Brian Pearce, chief economist at the International Air Transport Association, business travel is currently roughly 10% of pre-crisis levels, with employers reluctant to revive business trips due to their "duty of care" towards their employees.

Many market sources are expecting demand for leisure travel to return eventually to pre-pandemic levels, despite the popularity of domestic holiday destinations this summer.

Supply shifts from Europe to Middle East

What 2020 brought back to the European refinery sector was the threat of closures and rationalization, which had remained dormant for several years. As the International Energy Agency pointed out, COVID-19 was only an "aggravating factor" to the already existing problem of overcapacity.

Gunvor's Antwerp, Finland's Naantali and France's Grandpuits will not process crude again and other refineries are likely to follow in the footsteps of Grandpuits and turn to renewables. The UK's Grangemouth will keep two units closed in order to reduce costs. Some full or partial temporary closures, like France's Donges, Portugal's Porto, Croatia's Rijeka and a host of Spanish plants, will last at least into the start of the new year.

Meanwhile, additional capacity is on the horizon, which could pose extra challenges. Saudi Arabia's Jazan could start operations in the first quarter and Kuwait's Al-Zour is already carrying out test runs. While more closures are on the cards, the rationalization has happened faster than expected and is already halfway through, according to HSBC Global Research.

Transportation fuels continue to get cleaner

Not only is the EU Renewable Energy Directive (REDII) setting higher targets for renewable energy consumption in the next decade, but European citizens are increasingly turning away from diesel cars and buying gasoline hybrids and electric vehicles in increasing quantities. While the introduction of REDII is not expected to make much of an impact on diesel demand, the use of diesel in passenger cars is slowly but undeniably waning.

Governments are also trying to deter the use of gasoil and kerosene burners for heating. Starting in 2021, Germany will raise taxes on 50ppm gasoil.

In 2021, the adoption of Sustainable Aviation Fuel is expected to ramp up as IATA renews calls for more government support and mandates to champion the biofuel. On Dec. 1, Finnish refiner Neste announced the acquisition of a minority stake in Schiphol airport's fuel storage company in order to supply SAF to airlines operating at the Dutch airport hub.