A dive into distillates: The latest on Europe’s diesel and jet fuel markets

View Full Transcript

Gary Clark:

Hello and welcome to the Platts Oil Markets Podcast by S&P Global Commodity Insights, where today we'll be talking about the European diesel and jet fuel markets, which have diverging demand trajectories but remain well supplied despite geopolitical tensions in the Middle East and the potential for new legislation in the EU, which could disrupt the origin of oil product imports into Europe.

I'm Gary Clark, and I manage the EMEA Clean Refined Products price reporting team based out of London. I'm joined by Nadia Bliznikova, who is a senior price reporter looking at European diesel markets, and Virginie Malicier, who manages the EMEA Middle Distillates team. Welcome all.

Jet fuel and diesel prices are often highly correlated given they're fractions and neighbors in the distillation column. But we know diesel and jet fuel obviously have different supply and demand characteristics, and this results in their prices diverging at times. And we know that both jet fuel and diesel have got very divergent demand trajectories. We know that obviously flight traffic is increasing, whereas diesel demand in Europe is falling. But the interesting thing about both markets is they've been characterized as supply-driven markets. Jet fuel traditionally because it receives waves of imports from east of Suez markets. And lately, or more lately, shall we say, diesel since the start of the Russia-Ukraine war, Europe gets a lot more of its diesel from east of Suez markets, like the Arab Gulf and also the west coast of India.

So, supply-driven markets, and they're markets in which for both of them supply is very much in focus. Obviously we've had the Israel-Iran conflict. There's still tension surrounding that, and I'm sure we'll talk about risk premium for both jet fuel and diesel. But also notably a new legislation from the European Commission. Or potential, sorry, legislation on potentially banning oil imports into the EU, which have been made from Russian crudes, for instance. So both things which affect potentially supply in these markets.

So, moving over to you, Nadia. Maybe you could give us a bit of insight on what you are seeing for supply and demand in the European diesel markets right now.

Nadia Bliznikova:

Yeah, you're absolutely right. The Israel-Iran conflict sent European diesel markets into a tailspin as the rising tensions heightened the risk of supply disruptions from key producers and the potential spillover effects into other neighboring nations, oil-producing neighboring nations. As Middle East has become a key source of supply for Europe since the ban of Russian diesel, any supply shocks to the Gulf, such as the closure of the Strait of Hormuz, would have substantial impact on the European diesel market. And although the strait remained open for the duration of the conflict, the massive price movements that we saw since the start of the hostilities were largely driven by market sentiment, with traders pricing in fears of potential disruptions at a time when European inventories are already tight.

So as a result, we saw the front-month diesel futures contract surge to a near year high of almost $800 per metric ton on June 19th, while the prompt spread backwardation, which is a key gauge of market tightness, soared to its highest levels since February 2024.

But as I said, a lot of these movements were sentiment rather than fundamentals driven. So when the ceasefire was announced on June 24th, we saw a massive correction in the market, with front-month futures plunging from nearly $800 on June 19th to just 670 on June 24th. So although the market has definitely eased as the ceasefire seems to be holding up, it's definitely still not a well-supplied market at the moment. The backwardation is well above the levels we've seen this year and even most of 2024. It is currently hovering around the levels last seen in March last year, which suggests that the market is still experiencing substantial tightness despite the risk premium largely receding. And this has primarily been driven by a patchy US arbitrage in recent weeks as well as lower imports from Saudi Arabia, both key sources of diesel supply for Europe.

Although diesel exports from the US increased towards the end of the month compared to the first three weeks of June, market participants all said they didn't feel the volume or they weren't very tangible. And this is because European inventories had already been low for some time. Meanwhile, demand has increased seasonally. So for instance, diesel stocks in ARA plummeted to a 17-month low end of last week, lowest levels since January 2024.

So it makes sense then why even if imports marginally increased in the last week or so, they were not necessarily felt in the market. Clearly it looks like Europe needs a lot more volume to offset the rise in demand and falling inventories. And this is why any hint of supply disruptions, like the recent tensions in the Middle East, trigger an overreaction in the market, which had already been on edge from tightness.

Gary Clark:

I see. I understand, Nadia. So the diesel market, it's supplied, but it's still relatively tight. And you're talking... And there's the degree of risk premium still built in to the price because of the tensions in the Middle East and the potential risk of a closure to the Strait of Hormuz, et cetera, et cetera. But it's fundamentally, it's tight, and you're saying it was tight going into the conflict in the first place. Is that right? Yeah. Okay.

And so in terms of jet fuel, Virginie, what are the fundamentals for jet fuel at the moment?

Virginie Malicier:

Yeah, so the market seem quite well supplied going into the peak summer demand period. So what happened is before the start of the conflict between Israel and Iran, the market was quite balanced in Europe, so there was very strong demand expected for the summer. Trader were seeing demand similar to 2019 level, so back from pre-pandemic in term of jet fuel consumption despite an increase in engine efficiency.

On the other hand, we had a lot of flow coming from East Austria, around 2.3 million ton in June compared to 1.7 million ton in May. But that is in order to cover the demand that will grow until the peak week of beginning of August. But in term of cracks, we were seeing jet and diesel quite neck and neck for most of the past few years. But before the conflict in the Middle East of June, we had jet fell slightly ahead of diesel by around $1 per barrel above diesel. So basically jet was around $17 per barrel, diesel at 16. And now, we can see that both crack increase of product on June 13 and then when the US launched some missile on the nuclear sites. So crack increase a lot of June 18 and June 19. But now, they're still at elevated level, but with diesel above $3 above jet, so diesel at $23 per barrel and jet at $20 per barrel.

Gary Clark:

That's very interesting. So you're painting a picture here of where there's been little between the diesel and jet fuel markets, and typically you might see in the summer months the jet crack above the diesel crack because, like you were saying, you're going to that peak flying demand period. But you're saying right now, I guess given this diesel tightness and all the risks that are out there to supply, diesel is above jet in terms of the crack spreads.

Virginie Malicier:

Yes, actually that confirms what Nadia just said about the risk of supply disruption being more priced in the diesel physical crack even, and also the fact that the jet market is currently in Europe better supply than the diesel market. Because what has happened is when the conflict broke out, people stopped offering cargo, everyone was on the bid side, and so many jet cargo were bought, but flow at the end were absolutely not disrupted. So that's why we have a temporary small overhang of jet cargo in Europe. But in term of physical premium, if I look at cash differential versus the front months ICE LSGO, on June 9th they were at $36 per metric ton. Then on June 13 they had increased to $57.25 per metric ton. And now yesterday we assessed CIF Northwest European Jet Cargo at a $36 per metric ton, a premium over the front months ICE LSGO.

So we are kind of back to the level where we were before. But what remains in term of difference is really that currently refiner have a small incentive to produce more diesel than jet fuel.

Gary Clark:

Obviously you've mentioned... We've been talking about supply risks, and the obvious one, Israel-Iran, but I also mentioned at the beginning we've had this European Commission-led proposals to essentially ban the importation of oil products into the EU which are made from Russian crude. So what's the latest on that situation? Because obviously that would have a big impact on supply into Europe. We know for instance, 25% roughly of European jet fuel imports come from the west coast of India. We know that west coast Indian refiners use Russian crude as their feedstock to produce that jet fuel. So what's the latest with the situation on that?

Virginie Malicier:

Well, for the moment, it's a proposal. So it would change a lot in term of supply into Europe, like you said. So around, yes, 23% of jet will come from west coast India, and also you have some coming from China and some coming from Turkey for the mid-market. So these three country that also will supply Europe with diesel. And basically the refinery use Russian crude oil. And some refinery, like the Reliance refinery in India, it's well known that they have signed a longterm contract to get the Russian crude oil supply. So it'll be not so easy for them to switch. But also there's a Turkish refinery, which supply as a mid-market with jet and some diesel, have a little bit more of leeway in terms of their crude slate, because when there was some sanction against the shadow fleet in January, we know that some of them tried to get different crude supply to replace some of their Russian crude supply.

But overall, people so far, they don't know whether the sanction will be applied or not, because there is a proposal from the European Commission, but nothing has been voted yet. And so Nadia has more to say about the matter of the impact. But for me, the main danger in term of supply would be if the EU say, "Tomorrow we ban the import of oil product made in refinery which process Russian crude." Because if the sanction applies from one day to another, then it's mean that many cargo will have to divert. Many cargo planned to go to Europe will have to divert and we will see the supply elsewhere.

Gary Clark:

Obviously this is a risk right now. The market's very much in wait-and-see mode. And I hear what your sources are telling you around that, Virginie. So Nadia, what are your market sources telling you about what the potential impact on the market could be if this ban were to come into effect?

Nadia Bliznikova:

At least in diesel, the market didn't really seem to react very much to this news. We've already seen how adaptable markets are and how global flows can rearrange themselves to work within new dynamics. So the general market sentiment is that the impact of this, if enforced, will be rather minimal. At the end of the day, the global balances won't change, and products from Russian-origin crude will go to the east or to West Africa, while Europe will be of offset by more Middle Eastern supply. More Russian product could also go to South America, which would free up additional US supply for Europe. And besides Indian or Turkish refiners, yes, could adjust their balance of different crude intakes and get more crude of a different origin to substitute Russian. But the market participants think that as long as number of exports volumetrically do not exceed the number of crude intakes coming from Russia, we are unlikely to see a huge difference in the market. And if enforced, the ban could have some short-term impact, but it is unlikely to be held up in the long term.

Gary Clark:

That's understood. And I think you mentioned essentially market resilience in the face of supply disruptions and risks to supply. The market has been incredibly resilient since the onset of the Russia-Ukraine war in terms of that rearrangement in flows, which ultimately sees the supply fundamentals kind of settle down.

Well look, thank you very much. It's a fascinating conversation on diesel and jet fuel. As always, markets are fast moving, and now more so than ever given the supply uncertainties in focus, with maybe the Israel-Iran conflict lately overshadowing the potential impact posed by any new European legislation.

So keep up to date with Platts LIVE, the professional platform built exclusively for the energy industry. Have your say and join the conversation at plattslive.com. Thank you Nadia and Virginie, and thanks for listening.