Refiners across the world are struggling to recover their profits after the coronavirus pandemic, dragged by brimming diesel inventories and higher oil prices, which diminish the incentive to raise output even as fuel demand continues to improve. The profit margin for producing diesel from crude, or cracks, hit an all-time low in Europe. Cracks also plummeted in Asia and the US.
On average, diesel contributes to 50% of a refinery’s output. Hence, any weakness in diesel cracks will likely hurt refiners’ plan to recover after the health crisis. Tanker tracking data showed that dozens of tankers carrying diesel are anchored off Europe’s coast waiting to find buyers.
Analysts said that diesel consumption would take years to recover after the pandemic, forcing refiners to shut their units or lower production. Robert Campbell with consultancy Energy Aspects said at least 1 million bpd or about 1% of the world’s refining capacity would need to shut permanently to resolve the situation.
Refined products crack spread in the US narrowed to $9/barrel from $21/barrel a year ago. European diesel margins plummeted to a historic low of $2.9/barrel last week, while Asian diesel cracks averaged $4.26 in May, compared to last year’s average of $15.49/barrel.
When the COVID-19 containment measures began, refiners scrambled to produce more diesel due to its relative strength compared to jet fuel and gasoline. Some of them even blended excess jet fuel into diesel. As a result, diesel stocks swelled globally. In the US, distillate inventories have increased to a nine-year high of 174.3 million barrels by last week.
