After the Russian Middle Distillate Flood

After Russia flooded the global middle distillate market in the second quarter, Russia’s surplus will recede to more typical levels, according to ESAI Energy’s recently published CIS Watch. Early in the second quarter, Russia’s extraordinary surplus of roughly 1 million b/d of diesel and jet fuel contributed to bearish builds in global middle distillate stocks. Now as refiners emerge from maintenance, ESAI Energy predicts there will be less than 800,000 b/d of surplus. The decrease will not help clear the surplus in the global market. From the perspective of Russia, however, the worst of the “bearish onslaught” is behind us.

The CIS Watch report provides analysis of how oil companies will balance the requirement of producing enough gasoline to keep pace with recovering domestic demand for that product with the desire to maximize crude exports and defend market share in overseas crude markets. According to ESAI Energy’s analysis, refiners are more than capable of supplying the gasoline market without maximizing throughput. As the report highlights, the sharp decrease in gasoline stocks in May, which led to exaggerated claims of a gasoline supply crisis, was caused by high exports rather than lack of production. Results for June, when Russia raised gasoline production, sustained exports, and still added 1.3 million barrels to stocks, show refiners do not need to maximize utilization rates to supply the gasoline market. Going forward, moderate throughput levels will keep a lid on middle distillate production and exports.

“Were refineries to maximize utilization rates after maintenance, Russia would once again flood the global middle distillate market,” explains ESAI Energy Principal Andrew Reed. “But the gasoline shortage was exaggerated, and higher refinery throughput undermines crude exports and Russian market share in overseas crude markets. For the oversupplied middle distillate market, at least from the perspective of Russian exports, the worst is behind us.”

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