Europe’s diesel market has eased in recent weeks, as refiners and importers have responded to soaring margins. But the EU embargo on Russian oil is making slow headway, putting over 500,000 b/d of European diesel imports at risk in the coming months. Europe has limited potential to boost runs, especially as it would need to replace Russian crudes under an embargo. And while alternate sources of diesel imports are multiple, none are a full replacement for Russia. The source with the most potential is the Middle East, where new export refineries are coming online.
Middle East: Some of the bullishness in the European diesel market has eased. While (non-restricted) ULSD spreads in NWE were $52/barrel end April, they are currently $25/barrel. Seasonal factors and Europe’s refinery response to soaring margins have offered breathing room. The European diesel deficit declined February to April. EU-16 refiners boosted runs to a two-year high in April according to the latest Euroilstock report. Of note, Total Energies brought its 200,000 b/d Donges refinery in France back online after being shut for two years. Refiners abroad have also responded, with reports of diesel from India, the Middle East and the Gulf Coast heading to Europe. While Russian diesel exports fell in April, a large amount still flowed into ARA, although it could have headed into storage.
China: The government will allow diesel exports to begin again in the coming weeks. The ramp up of a new refinery will also boost diesel supplies. However, Chinese refineries are focused on meeting domestic demand and use exports as a pressure release.
US: An increase in refinery runs following spring maintenance will boost the US diesel surplus. An easing of NYH ULSD margins will also weaken the pull on diesel barrels into NYH. If more Russian diesel exports were to flow to Latin America, then Gulf Coast refiners could redirect their barrels to Europe. But competition from Latin America means that Europe will need to incentivize imports from the US through higher prices.
Middle East: The region’s diesel surplus is projected to reach 1.1 million b/d in the second half of the year. The increase comes from the region’s new export-oriented refineries. Saudi Arabia’s Jazan refinery has started exporting ULSD. At the same time, Kuwait’s Al-Zour refinery should start production in the third quarter. Our Middle East throughput projections are moderate, as they do not yet account for a full Russian embargo in the second half of the year. Were the embargo to go ahead, Middle East refiners would have room to raise refinery utilization rates further.