A mild winter could set the stage for a calm opening to 2024 in the European diesel market, but the region's ageing refinery capacity and potential unplanned outages could weigh on supply and contribute to keep markets volatile.
The opening months of 2024 are likely to find comfortable diesel supply in Europe for limited demand, especially as January typically brings the lowest diesel consumption of the year. The latest IEA data indicate diesel demand was 5.4pc down year-on-year in September in European OECD countries. Demand for other gasoil in the same countries — which is roughly a quarter of the total and mainly reflects marine and heating applications — was 23pc lower in the same period. The European Commission's autumn forecasts had 10 of the 27 EU members on track for annual gross domestic product (GDP) contraction in 2023.
If European demand recovers later in 2024, diesel margins may prove sensitive. The marginal supply will need to be imported, because Europe's refineries have been maximising diesel output in response to margins already high by historical standards. European refiners have little spare capacity to increase diesel output, and more frequent unplanned outages raise the threat of sudden supply dips.
Reported overheating among Mediterranean refineries during this summer, as well as protracted outages at German refineries and the announced closure of Petroineos' 150,000 b/d Grangemouth refinery in 2025 again shone a light on the fragility of the refining economic model in Europe, and underscored the continent's growing dependence on diesel and gasoil imports.
Volatile times
The European diesel market reacted more calmly than many expected to the EU and UK banning imports from Russia, formerly by far the region's largest external supplier. Fob ARA diesel cargo margins against North Sea Dated crude averaged around $27/bl in the 10 months after the ban, well below the $42/bl average in the preceding 10 months.
But the average post-ban margin was still nearly double the $15/bl average from 2019, before the Covid-19 pandemic and then Russia's invasion of Ukraine. Average day-on-day changes in the front-month Ice gasoil futures value was still around $19/t in the first 10 months after the ban — less than the $37/t in the preceding 10 months, but far more than around $9/t in the 10 months before the war began.
Prices remained highly volatile, reflecting Europe's increased dependency on imports from much further afield. Diesel imports to northwest Europe now come mostly from the Middle East, India and the US.
But Europe can take some comfort from the introduction of new large refinery projects, which will probably ease diesel supply concerns by building on the continent's list of alternative suppliers to Russia. The 650,000 b/d Dangote refinery is due to come online in Nigeria next year, joining Oman's 230,000 b/d Duqm, Bahrain's 130,000 b/d Sitra, Mexico's 340,000 b/d Dos Bocas and China's 400,000 b/d Yulong refineries.
