While most of the market’s attention has been focused on how fast gasoline demand will recover, lower economic and manufacturing activity in all regions of the world has led to an oversupply in distillates, including diesel, gasoil, and jet fuel. Faced with an unprecedented crash in jet fuel demand amid the pandemic, refiners have geared toward making more of the other distillate fuels, whose stocks have risen to levels not seen in decades.
The glut in diesel and other middle distillates has become so evident in recent weeks that traders have started to charter tankers to store fuels for sale at a later date.
With distillate inventories sitting well above five-year averages and global fuel demand recovery faltering, refiners don’t have much incentive to process increased volumes because the refining margins have tumbled with the glut.
“Persistently weak refinery margins provide little incentive to boost crude purchases,” the International Energy Agency (IEA) said in its monthly flagship Oil Market Report this week.
Weak demand for fuels continues to curb any price gains above $40, despite the fact that a U.S. crude inventory draw this week boosted prices. However, while reporting a crude oil inventory draw of 4.4 million barrels for the week to September 11, the U.S. Energy Information Administration also reported a build of 3.5 million barrels in distillate fuels for the second week of September, with those inventories still remaining more than 20 percent above the five-year average as air travel remains constricted by pandemic-related restrictions and concerns.
Crude oil inputs at U.S. refiners were 13.488 million bpd in the week to September 11, which was 19.3 percent lower than in the same week last year. Distillate inventories swelled to 179.3 million barrels, up by 31.2 percent from year ago.
Distillate stocks have been persistently rising, despite the fact that refiners have been processing more crude into gasoline instead of middle distillates. The gasoline-to-distillate ratio in the product slate has increased to 1.7 to 1 from 1.4 to 1 at the same time last year, according to estimates by Reuters columnist John Kemp.
Middle distillates are struggling to find markets amid weak demand outside the United States, too. Slower-than-expected fuel demand recovery amid the economic slump and still precariously low aviation fuel consumption have sent distillate stocks around the world to multi-year highs. This, in turn, has led to disastrously low refining margins in every part of the world, discouraging refiners to process increased volumes of crude into fuels.
Refining margins of products other than jet fuel are also slumping because refiners are now reluctant to produce too much aviation fuel with demand so low, instead preferring to make other distillates.
For example, the Singapore gasoil refining margins plunged this week to a record low, according to Argus estimates, as supply increased with refiners looking to maximize production of gasoil over jet fuel.
Stocks of distillates such as diesel and gasoil are uncharacteristically high everywhere, from the U.S. Gulf Coast to the Amsterdam-Rotterdam-Antwerp (ARA) trading hub in Europe.
Probably one of the strongest signals of a growing global glut in distillates is increased interest from traders to hire oil product tankers to store diesel as floating storage, tanker owners and tanker-tracking firms told Bloomberg this week. Floating storage of diesel and jet fuel is on the rise in northwest Europe with the contango – in which prices for delivery at later dates are higher than front-month prices that typically points to oversupply – widening and making sense for traders to pay for chartering tankers and still make profits when they sell the product later.
Bloomberg’s estimates show that the contango in the diesel market is even wider than it is for crude oil, suggesting that interest in floating storage of distillates could be higher than that for crude.
Weaker-than-expected demand recovery has depressed distillate fuel consumption and led to a glut, which is set to continue to depress oil prices.