European refiners will face more competition from 10ppm diesel imports in 2015 as Russia, the Middle East and Asia-Pacific increase output.
Diesel consumption is set to increase in some countries, including Turkey and UAE, and this will soak up a portion of the extra 10ppm supply. But margins are expected to come under pressure in the coming months, potentially leading to more refinery closures.
A closed transatlantic arbitrage pulled diesel premiums higher in late 2014, taking French diesel premiums to Ice gasoil futures to over $40/t in mid-November. But they came back down in December even though the arbitrage from the US remained closed amid steady supplies from Russia and Asia-Pacific.
Unseasonably warm weather has slowed demand in Europe to date, and it is unlikely to increase noticeably this winter unless temperatures drop significantly.
Demand in 2015 may see the first impact of initiatives in France and the UK to tilt the fiscal balance back towards gasoline after years in which European refiners — long on gasoline production — have complained that tax policy favours diesel consumption and worsens the structural imbalance. At the same time, the traditional gasoline arbitrage trade to the US has shrivelled with the rise in shale oil production there that has also brought burgeoning US diesel exports to Europe.
The French government said in October that it plans to raise its tax on diesel by 2¢/litre in the 2015 budget. French prime minister Manuel Valls said in November that prioritising diesel over gasoline was a mistake.
The UK parliament's environmental audit committee has proposed measures aimed at taking diesel cars off the road. The committee's recommendations that were unveiled in December include the introduction of a diesel scrappage scheme to help drivers switch to cleaner vehicles. It also called on the government to examine fiscal measures to encourage a move away from diesel vehicles.
Demand from Turkey is on the rise, with diesel consumption expected to climb by 23pc from 2013 to 19.4mn t in 2020, taking some of the diesel supplies from Russia and other markets. That said, Turkish refiner Tupras expects to have all new units at its 227,000 b/d Izmit refinery fully operational during the first quarter. The upgrade is intended to win Tupras a bigger stake in the country's diesel market. The new units will produce 2.9mn t/yr of diesel and jet fuel. Turkey imported 8.3mn t of diesel in the first nine months of 2014, compared with domestic production of 4.4mn t, so the impact of the new production will be considerable.
Shell estimates European middle distillate consumption will be boosted by 330,000 b/d next year as new rules come into effect limiting the sulphur content of marine fuels within Emission Control Areas to 0.1pc. Bankrupt marine fuels supplier OW Bunker previously said it expected European middle distillate consumption to increase by 280,000 b/d next year.
Refining industry association Fuels Europe estimates that European marine gasoil demand will climb by 14mn t next year as the new regulations come into effect.
Marine gasoil (MGO) will account for 6pc of total European diesel and gasoil demand in 2015, up from its current 2pc share.
On the supply side, the flow of diesel from other markets is set to rise next year as refineries increase 10ppm production capacity and undergo upgrades.
Russian 10ppm diesel production has been increasing steadily, with total output increasing by 47.2pc to 27.58mn t in January-September this year from the same period in 2013. Total gasoil and diesel exports rose to 39.65mn t in January-October this year from 35.1mn t in the equivalent period of 2013.
All Russian refineries, with the exceptions of Syzran and the Samara group of plants, will start shipping 10ppm diesel through Transneft's pipelines next year. It is currently unclear when the transition will be completed, but Transneft's pipelines could start delivering pure 10ppm diesel as early as January.
Transneft said exports of 10ppm are more attractive than lower grades and Russia's entire pipeline system will switch to transporting only 10ppm diesel in the foreseeable future.
Gazprom's Salavat refinery and the Antipinsky refinery will start producing 10ppm diesel from January and supplies from Kirishi are set to double. Diesel supplies from Lukoil's Perm refinery are also expected to increase.
There has already been an increase in 10ppm diesel exports from the Russian port of Primorsk, which is the main source of EU-quality diesel from FSU refineries. The port will handle more than 11mn t this year, compared with 9.3mn t and 6.5mn t shipped through the port in 2013 and 2012 respectively. Primorsk is expected to receive 14.5mn t of the product next year. Supplies from the Sever pipeline will rise following an increase in its capacity to 15mn t/yr from 11 mn t/yr previously.
Changes to crude and oil product export duties introduced by the Russian government at the end of 2014 will stimulate diesel exports. Under the new rules, coefficients used to calculate clean product export duties will decrease significantly. Coefficients for diesel will drop from 65pc to 48pc in 2015, 40pc in 2016 and 30pc in 2017.
Russian diesel supplies will compete with product shipped from India and the Middle East, which have also been ramping up their 10ppm production.
Indian companies including HPCL-Mittal energy and IOC are planning to upgrade or expand their production. India's Reliance has applied to increase capacity at its 1.24mn b/d Jamnagar refinery by 30pc and state-run refiner Bharat Petroleum plans to expand its 190,000 b/d Kochi refinery at Kerala to 310,000 b/d.
India's Reliance could reduce diesel shipments to Europe because of the increasing competition from Mideast Gulf 10ppm diesel. It could send more product to Australia, where refinery closures could spur diesel imports.
Meanwhile, the Saudi Aramco-Total joint venture Satorp's 400,000 b/d Jubail refinery reached its capacity in August-September, a year after starting up. Jubail will produce 200,000 b/d of 10ppm diesel. But most of it will stay in the region as domestic demand for diesel keeps growing.
In the US, exports of distillate fuel oil with sulphur content of up to 15ppm is on pace to increase this year compared with 2013. In January-September this year, the US exported more than 33.2mn t, up from the 29.84mn t exported in the equivalent period of 2013.
Europe remains well supplied as gasoil stocks in the Amsterdam-Rotterdam-Antwerp trading hub have been above 2.5mn t for almost the entire second half of the year, averaging 2.68mn t. In the first half of the year, ARA gasoil inventories averaged 1.85mn t.
Local production is likely to be impacted by refinery closures, with Total and Eni preparing for capacity reductions in 2015. In November, Eni agreed to turn its 105,000 b/d Gela refinery in Sicily into a biorefinery. And in the UK, Murphy Oil's 130,000 b/d Milford Haven facility closed following the collapse of a planned sale to Geneva-based investment group Klesch.
Total's promise not to close capacity in France expires in 2015 and the company is expected to permanently shut at least one plant.
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