London — Demand for European transportation fuels fell to modern historical lows at the end of the first quarter as people were told to stay at home to combat the spread of COVID-19.
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European refineries started to significantly cut their run rates due to the disastrous crack spreads of jet fuel and gasoline.
With demand expected to fall even further in the coming weeks, some refineries are already mulling a temporary shutdown as their storage capacity reaches its limits.
This shows how severe the demand destruction on the oil market has been. Despite crude prices trading close to two-decade lows, refineries are looking to cut runs to survive.
Jet fuel was the first and foremost commodity casualty of the coronavirus pandemic, with widespread flight cancellations during Q1, sapping demand.
The physical jet CIF NWE cargo outright price plunged to $221/mt on March 30, its lowest value since June 12, 2002, and a 66% fall from $652.25/mt on January 2.
While jet fuel typically trades at a comfortable premium to the front-month ICE low-sulfur gasoil futures contract, it was assessed at a record discount of $66/mt on March 23, down from a premium of $39.75/mt on January 2.
Jet fuel traders have been looking to put more material into storage to cope with the lack of prompt demand, with the whole supply chain under stress.
More and more refiners are blending jet fuel into diesel in response to the lack of demand.
Gasoline sinks, diesel plunge not as steep
Gasoline soon followed the crash in jet fuel prices, as borders were closed, many Europeans started to work from home and social distancing measures discouraged travel.
Gasoline plunged to record lows in late March, with Eurobob barges assessed by Platts at $144.25/mt on March 24.
As the pandemic began to affect the US, especially New York, the traditional gasoline arbitrage from Europe to the US Atlantic Coast shut completely, pushing the front-month Eurobob gasoline crack versus Brent to a record low of minus $8.80/b on March 24.
Gasoline typically sees heightened production and demand into the summer months, with the US market one of the biggest drivers of this.
Early into the coronavirus outbreak, diesel didn't see the same dip. It was helped by heating oil demand, with 10 ppm diesel filling 50 ppm gasoil short positions in Germany and Switzerland for use heating homes and filling storage tanks amid a steep paper market contango.
"Demand for heating oil is fine, right now just filling up storage tanks. But after this wave is over, I'm worried," one trade source said.
However, slowing economic activity due to lockdowns and much lower passenger car use did eventually catch up the diesel market, which was seen notably weaker in late March.
While there has been little in the way of government data capturing the scope of the falls available as of the end of Q1, some numbers from Spain provided a clear glimpse into the effects of lockdown.
According to national fuel distributor Compania Logistica de Hidrocarburos, road fuel consumption in the country plunged during the week ending March 29.
Sales of gasoline fell 83% year on year, with deliveries of automotive diesel dropping 61% year-on-year and jet fuel use crashing 85%.
Meanwhile, refineries in Italy and France are not restarting from maintenance, which would also lift some of the pressure of a supply glut.
Reduced throughput will be the main feature at least in the early parts of Q2. Consultancy Facts Global Energy estimates that global refinery runs have already fallen by 5 million b/d since January and expects the cuts to peak at 15 million-20 million b/d "at the height of the pandemic."
On the paper market, ICE low sulfur gasoil futures outright prices tumbled alongside the broader oil complex, under pressure from the coronavirus spread and the Saudi-Russia price war. This moved the ICE LSGO curve into a deep contango over the course of Q1. The December 2020/December 2021 spread started the year in a $12/mt backwardation and had fallen to a $38.50/mt contango as of March 30, the lowest level on record.
In Q2, the market will be looking for more signs of the timeline of recovery, with the structure of the jet swaps market displaying expectations of a slow recovery throughout 2020 and 2021.