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Europe facing further diesel price hikes

Friday, September 07 09:47:15

Europe may face soaring diesel prices this autumn after a string of refinery accidents ahead of routine closures have tightened fuel supplies worldwide, sounding alarm bells in Western governments. The United States is pressing for a release of oil stocks from Western nations, supervised by the International Energy Agency. The reluctant IEA has stressed that the problem is not with crude supply, but with the flow of products from refineries, as wholesale fuel prices in Asian markets have already hit four-year highs..

It is a similar picture in Europe, where ICE diesel futures have risen from around $827 a tonne in June to almost $1,030 a tonne in September, hindering economic recovery. Europe does not produce enough diesel for its own needs and historically has relied on imports to fill the gap, but traders are worried it will face a supply crunch this autumn. The market has been tightening rapidly since July after the UK's Coryton refinery closed for good. Demand for gasoil, a category which includes both diesel and heating oil, has remained resilient. "Demand is stronger than economic prognosis indicates. There's a global trough in refining throughput which is extremely bullish for distillates," said Seth Kleinman, head of energy strategy at Citigroup. With gasoil refining margins reaching unseasonal highs of almost $20 a barrel in August, European refiners have increased runs, but they are not able to produce all the diesel that Europe needs. Now the market is tightening further due to lower imports from Asia and the United States following major U.S. refinery outages, including a fire at a Chevron refinery in California and the temporary closure of Lousiana refineries during Hurricane Isaac.

"Asian product barrels are going to South America and the West Coast of the U.S. because Chevron's Richmond refinery is out. Those barrels would have come to Europe but the arbitrage flow has changed - nothing is coming now," a trader said. For the same reason, U.S. diesel exports to Europe have fallen after U.S. prices shot up. "The U.S. arbitrage is slammed shut," a trader confirmed. Other unexpected outages have cemented the trend. Venezuela's 645,000 barrel-per-day (bpd) Amauy refinery suffered a massive explosion in August, attracting more barrels to the Americas to meet the expected shortfall.

"Taken together, the downstream losses are larger than the upstream losses, translating into tighter product markets," said JP Morgan analyst Colin Fenton. JP Morgan estimates that about 11 million barrels of middle distillates will be displaced by the combined production outages for the period up until September 12, but sees losses persisting into October. Russian middle distillate exports to Europe are also seen falling in September due to higher export taxes and planned maintenance by at least six refineries. The Russian government is also trying to encourage middle distillates to stay in the country during the maintenance period by increasing the export duty to $259.90 a tonne from $222.10 a tonne in August.

With European refinery margins so healthy and supplies so tight, some have suggested planned maintenance may be delayed. But other traders are sceptical, and believe September and October could prove crunch months in markets like the UK, where Ineos's Grangemouth refinery, Essar's Stanlow and Valero's Pembroke all have maintenance scheduled. "I don't see maintenance being delayed, Ineos is already mid-way through theirs and others are going to do it regardless of spot values," said one broker. A trader also dismissed the suggestion, predicting further tightening. "Demand is low and runs are at the maximum so although in the near term there is the potential for the market to soften, I do remain constructive thereafter," he said.

On the demand side, traders are waiting to see if German households will restock their heating oil tanks this autumn, which are currently only about 56 percent full. Apart from a brief flurry of activity mid-summer when gasoil prices fell to around $806 a tonne, German consumers have been sitting on their hands. "Product stocks are at unseasonably low levels, and the German consumer has stopped buying now the flat price has gone up again," a trader said. He suggested they might try to ride out the winter with tanks at half-capacity. Given this, some have expressed concern about price spikes in middle distillates, particularly if winter comes early. ( C) Reuters