For the past years, oil refiners have been producing refined products based on three consumption patterns, a large portion for gasoline, a certain amount of diesel, and a proportion of jet fuel. These companies can tune how much crude they processed to make these three main refined products. However, the coronavirus pandemic disrupts the dynamics, hurting refining margins even as oil prices hover around $40/barrel.
Sluggish industrial and trade activity hurt demand for diesel, which is usually used in trucks, industrial machines, and public transport. At the same time, people are avoiding mass transportation and prefer to drive their private cars or motorbikes, creating a surge in gasoline demand. On the other hand, restrictions on air travel put jet fuel consumption under intense pressure.
As a result, gasoline inventories continued to plunge in some markets, with India starting a rare move to import the fuel. Refiners responded to a plunge in jet fuel demand by reblending it to make diesel. However, as people shunned public transport and worked from home, diesel demand fell, creating an enormous supply glut.
In the US, inventories of distillate fuel oil, including diesel, are near the seasonal highest since 1991. The oversupply has crushed margins and forced major refineries to idle their diesel-making unit. The diesel crack spread fell to $8.50/barrel last week, compared to $25/barrel a year earlier. In Singapore, gasoline was traded at a $3.26/barrel premium against diesel, the highest since 2017. In March, gasoline was at a $25/barrel discount against diesel. European refiners also face a similar challenge, with diesel crack spread there plunging to as low as $2/barrel in recent weeks.
