Europe draws record diesel supplies as refiners continue to run near capacity

Europe is bracing for record diesel inflows in August as refiners running near capacity have sought export outlets, though signs of inventories piling up show demand is struggling to keep pace.

Lackluster demand failed to deter huge transatlantic arbitrage inflows in July, while traders in the Middle East traders scrambled to clean up very large crude carriers to transport almost four times the average volumes shipped on typical large-range product carriers around the Cape of Good Hope.

In August, over 6.2 million metric tons of diesel/gasoil is set to arrive at European ports from global exporters, with 3.9 million t already delivered and a further 2.3 million t currently inbound, according to S&P Global Commodities at Sea data.

US exports will account for the bulk of arrivals, totaling over 2 million t, while flows from the Middle East Gulf are set to surge 66% on the month as volumes landing from the United Arab Emirates are expected to triple to 617,000 mt and volumes arriving from Qatar will more than double to 431,000 mt.

Demand lags

The arrival of new product has already translated to strong injections to European fuel inventories, leaving diesel and gasoil volumes stored at the Amsterdam-Rotterdam-Antwerp almost 20% higher than 2023 levels and at the highest levels since June 2023 as supplies jumped to 2.346 million mt in the week to Aug. 22.

Demand has remained ill-equipped to absorb historic volumes of oil imports, according to sources, who flagged stalling German inland consumption and little sign of imminent recovery.

According to the latest data from the Joint Organizations Data Initiative (JODI), diesel/gasoil demand in Germany, Europe's industrial heartland, slumped to 27 million barrels in June, down from 29 million in May and remaining well below a previous 5-year average of over 30 million barrels.

Instead, the continent has attracted robust inflows as US refiners have continued to run near full tilt to capitalize on healthy margins, but have eyed export markets to place surplus barrels due to limited storage availability domestically.

According to the latest data from the US Energy Information administration, refinery capacity utilization in the US averaged 91.1% in the four weeks to Aug. 16, up from a July average of 90.3%, and production has continued apace.

"It's nuts, crazy," one European source. "It feels like the US pushed a lot [over] to us."

"The US Gulf Coast is exporting 1.5 million barrels a day, they cannot switch off their refineries so the question is why wouldn't they send product over?," said a second market source. "They need to find a home and three weeks ago that home was Europe."

Fears that regional heatwaves might trigger supply vacuums in Europe have failed to materialize in substantial volumes, meanwhile, causing traders to flag a closing window for 'swing' arbitrage flows from the US in particular.

Fall in focus

Whether refiners can sustain high run rates through the fall will rely on seasonal heating demand and supply-side swing factors, according to sources.

Already, signs of weak fundamentals have caused prompt supply to be priced at increasingly large discounts, with the ICE LSGO contango structure trading over recent weeks within a 25 cent/mt range of a three-month high of $3.50/mt reached on Aug. 20 . Platts assessed the ICE LSGO M1/M2 spread in a $3.25/mt contango on Aug. 23.

"Diesel cracks in Europe are mostly healthy and continue to trade sideways, and there's talk about seasonal uplift this autumn due to heating oil season," said Rebeka Foley, an oil analyst at S&P Global, before flagging that ARA stocks above the 5-year average could mitigate strength.

"This makes me feel less bullish about diesel cracks in coming months, especially as we've been seeing increasingly mild winters in recent years," she said.

Middle Eastern flows could prove more resilient than US exports through September, traders said, though Arab Gulf refiners could prove less capable of servicing Europe's winter fuel specifications.

Meanwhile Arne Lohmann Rasmussen, chief analyst at Global Risk Management, flagged potential supply shocks remain an upside risk. "Strong jet fuel demand, possible new Ukranian attacks on Russian refineries and a possible halt to Russian diesel exports add upside to gasoil and jet fuel," he said.

Russia has so far avoided repeating bans on its diesel exports imposed last year, but has prohibited gasoline supplies from being delivered outside Russia and the Eurasian Economic Union until the end of 2024.