Commodities 2023: Limited diesel, jet supplies set to dominate European transport fuels sector in 2023

The loss of Russian diesel from the European supply pool with sanctions coming into force in February is expected to choke both diesel and jet fuel supply in Europe as refineries prioritize the road fuel, against a backdrop of evolving trade flows as Chinese demand ramps back up and persistent concerns over the impact of a recession on demand.

While demand concerns hover across the barrel, not least gasoline as bearish macroeconomics weigh on the prospects for discretionary driving this winter, watchers of the middle of the barrel will be most focused on the supply side of the equation.

Concerns about this have kept refining margins for the relevant products well supported.

Diesel has been especially profitable. November saw falls in diesel cracks but values started creeping up in December. They are likely to remain above those prior to Russia's invasion of Ukraine Feb. 24 and the resulting international sanctions, according to the International Energy Agency.

Platts, part of S&P Global Commodity Insights, assessed 10ppm diesel FOB ARA versus Brent front-month paper at $41.11/b at the start of November, it then fell to $38.57/b by the end of the month. Platts assessed the crack at $38.54/b Dec. 19.

Before the war, on Feb. 23, Platts assessed the crack at $16.90/b.

The ongoing strength in cracks is a structural issue and due to the "mismatch in refinery yield profiles and the share of middle distillates in refined product demand," the IEA said.

Most of the extreme price dislocations have likely happened already. However, a number of other disruptions lie ahead; these include further reconfiguring of flows from Russia and of flows from elsewhere to Europe as companies look to comply with European Union a ban on Russian oil product imports starting Feb. 5, the easing of Chinese zero-COVID policies and an accompanying rise in demand and the timing of new refinery startups, the IEA said.

Overall, the agency sees growth in buying appetite for all three products in 2023. Gasoline demand is set to rise 0.6% on the year to 26.120 million b/d in 2023, jet fuel to rise by 12.8% to 6.838 million b/d, and diesel and gasoil to rise by 0.4% to 28.446 million b/d.

Macroeconomics weigh on gasoline outlook

Retail fuel prices for gasoline in the EU have softened since early November but remain high in historical terms and this is deterring discretionary driving, with high inflation and the cost of living crisis weighing on the prospects for demand recovery, analysts at S&P Global said Dec. 9.

Gasoline cracks in all the main hubs are on the soft side, in line with seasonal trends, and are not expected to firm substantially until February-March, ahead of the northern hemisphere driving season, S&P Global said.

S&P Global calculates gasoline cracks at Amsterdam-Rotterdam-Antwerp will be $14.25/b in December 2022, edging down to $12.42/b in Q1 2023.

European diesel markets look away from Russia

Global diesel stocks were playing catch-up even before Russia's invasion of Ukraine. They had emerged from the pandemic with demand having largely recovered but with significant losses to refining capacity, particularly in Europe.

With sanctions choking off Russian supply to EU countries, likely additional volumes will need to come from the Middle East, Asia, and the US.

The outlook for margins remains stable. S&P Global projects ARA will be $41.14/b in December 2022 and $43.22 in Q1 2023.

Diesel squeezes jet

The outlook for jet fuel is murky until at least June, with uncertainty centered not on COVID-related factors, which dominated the market over the past couple of years, but on Russia, according to market sources.

The market must look for new supply of middle distillates and where European refining seeks to maximize output it will be in favor of diesel and not jet, which will have to come from India, China and South Korea and this implies greater freight costs, sources said. In this sense it will follow a pattern established in 2022, they said.

Demand is growing but the outlook is still below that of 2019. Lufthansa predicts flight operations from its Frankfurt and Munich hubs will reach 5,200 a week, meaning the airline will operate in 2023 at 87% of its 2019 level.

LATAM expects its full capacity in 2022 will be 85% of its pre-pandemic capacity levels and Cathay Pacific expects it full capacity in December 2023 to be 70% of its 2019 level.