European refinery economics are shifting back towards road fuels as diesel and gasoline markets tighten and concerns over jet fuel supply ease.
Market participants expect the shift to encourage refiners to dial back some of the jet fuel production increases made earlier in the US-Iran war in favour of diesel and gasoline.
European refiners boosted jet fuel production in March-June as concerns over supply pushed jet fuel margins above $100/bl. But tightening road fuel markets and softer jet fuel fundamentals are beginning to reverse that trend.
European diesel and gasoline values have strengthened in recent weeks. Diesel cracks are around $70/bl, their highest in three months, while gasoline cracks are at four-year highs of around $40/bl. In contrast, jet cracks have fallen to around $60/bl.
Russia, the world's second-largest diesel exporter, announced a ban on diesel exports on 8 July, raising the prospect of tighter global supply. Europe will now face greater competition for remaining diesel cargoes, as Turkey and buyers in north Africa seek to replace Russian supplies. The US could help fill some of Europe's diesel shortfall, although Europe will face competition from Brazil for US cargoes.
Diesel has priced above jet fuel for the past three weeks, after moving above jet for the first time this year. Argus Consulting expects the spread to remain in diesel's favour over the coming months.
Meanwhile, gasoline demand has picked up in Europe in recent weeks, especially in the Mediterranean and Germany, traders said. Export demand from Europe's secondary markets has also firmed, and shipments to Brazil, Canada, Egypt, Libya and Syria are expected to rise sharply in July. Market participants said demand is outstripping availability.
Refiners have increased blending activity in recent weeks, drawing down blending component stocks. Naphtha prices have rallied, supported by demand from gasoline blenders and petrochemical buyers, lifting naphtha cracks to a 10-year high.
Jet fuel prices remain supported by strength across the wider middle distillate complex, but jet fundamentals look softer. Europe has coped with the loss of Middle Eastern flows and supply concerns have eased.
European jet fuel imports hit an eight-month high in June, supported by record US and Nigerian deliveries. More jet fuel from east of Suez is due to arrive in Europe this month, while Chinese jet fuel exports are set to increase, supporting global balances.
Spain's Repsol has already begun prioritising diesel and gasoline production after previously boosting jet fuel output.
Refiners can typically shift a portion of output between kerosine and gasoil pools.
Refining margins for secondary units have strengthened at the same time. Margins for an average hydrocracker, producing diesel and gasoline at a 70:30 ratio, rose to a $30.46/bl premium to Ice Brent crude earlier this week, Argus calculations show. Margins for a typical fluid catalytic cracker (FCC), producing gasoline and diesel at a 70:30 ratio, rose to a $23.42/bl premium. Both margins were trading at discounts to crude in early June.
Heavier naphtha-grade material will probably return to the gasoline blending pool instead of the kerosine pool, according to one market analyst. Some refiners had been taking larger kerosine cuts from petrochemical units, but this has probably also decreased now.
A pivot away from jet fuel output could leave the market exposed if supply tightens again. European jet fuel inventories remain heavily depleted and will probably not rebuild until the new year, according to Argus Consulting, leaving little cushion if supply gaps re-emerge.
