European products demand faces new lockdowns headwinds

The imposition of stricter and longer lockdown measures to tackle Covid-19 in several European countries is likely to be another setback for any recovery in the road fuel markets from the lows caused by the pandemic.

The German government made a "radical" but "absolutely necessary" tightening of its lockdown measures yesterday, which are now scheduled to last at least until the end of this month and will in some regions restrict travel to within a 15km radius. Earlier in the week the UK government imposed a new nationwide lockdown that could last into March. Scotland imposed a full nationwide lockdown for this month on the same day.

The new measures come in reaction to rising infection rates and higher death tolls. The UK reported a new record 62,322 new cases today, and German daily deaths hit a record 1,122 in late December having only just exceeded 500 on the worst day in the first wave of the pandemic. European countries such as Poland are now reimposing measures after a temporary relaxation over the Christmas period.

Germany and the UK are Europe's two largest gasoline markets, and Germany is the continent's largest diesel consuming nation, and the renewed or tightened lockdowns may affect road fuel demand. Measures as strict as those in March could reduce road fuels demand below recent months' levels and back to their lowest since last spring.

UK oil products demand fell by as much as 51pc year on year in April 2020 — the first full month of strict lockdown measures — with road fuels most affected. Demand for gasoline, jet kerosine and diesel dropped by 80pc, 58pc and 49pc, respectively, over that period. By comparison, demand was down by 24pc on the year in November, with gasoline, jet fuel and gasoil down by a respective 35pc, 50pc and 17pc.

Eurobob oxy gasoline fell to a $1.90/bl premium to North Sea Dated crude yesterday, the first day of the new lockdown measures, from $4.70/bl — the highest since late-October — the previous day. Some of that move may be because of a rise in crude prices. European gasoline suppliers will hope restrictions are lifted in time for the seasonal transition to higher-specification summer-grade product on 1 April, which coincides with a lift in road fuel demand. Europe's 2020 summer driving-season demand was significantly reduced by Covid-19.

The new travel restrictions will also have an effect on middle-distillates margins, which gained some support towards the end of 2020. Northwest European diesel cargoes averaged a premium of $6.08/bl to Dated last month, the firmest since July, but slipped below that to around $5.80/bl by the close of yesterday. Adding further pressure, rising bookings for export cargoes east of Suez for delivery to northwest Europe will bring more supply to the Amsterdam-Rotterdam-Antwerp (ARA) hub. And the recent atypical flow of European diesel to the US could come under threat with US refinery rates trending higher.

Those factors could offset recent support from positive manufacturing data. The eurozone's manufacturing sector expanded for a sixth successive month in December, and at the fastest rate since May 2018, with output and new orders up markedly. Any increase in industrial activity is typically associated with higher diesel use.

European jet kerosine margins received support last month from heavily reduced refinery output and low imports from other regions. Jet crack spreads averaged a $4.61/bl premium to Dated in December, their firmest since $9.19/bl in March. But there has been a recent spate of flight bans, and tighter travel restrictions make a demand recovery look less likely.

By Robert Harvey, George King Cassell, Elliot Radley and Florence Schmit