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Although much of the market’s attention has been focused on how fast gasoline demand will recover, the decline in economic and manufacturing activity around the world has led to an oversupply of distillates, including diesel, gasoline and aviation fuel. In the face of an unprecedented drop in aviation fuel demand during the outbreak, refiners have turned to other distillates, whose stocks have risen to the highest level in decades.
In recent weeks, the oversupply of diesel and other middle distillates has become so obvious that traders are renting tankers to store fuel for later sale.
With distillate oil storage much higher than the five-year average level and the global fuel demand recovery is weak, refiners do not have much power to absorb the increased output, and refining profit margin has declined sharply due to oversupply.
In its monthly flagship oil market report this week, the International Energy Agency (IEA) said that refinery profits remained weak and did not provide any incentive to increase crude oil purchases.
Weak fuel demand continued to hold oil prices above $40 a barrel, although US crude oil inventories helped oil prices this week. However, while the U.S. energy information administration released 4.4 million barrels of crude oil inventory for the week ending September 11, it also announced 3.5 million barrels of distillate fuel production in the second week of September, which is still 20% higher than the five-year average.
In the week ending September 11, crude oil production at U.S. refineries was 13.488 million barrels a day, down 19.3% from a year earlier. Distillate inventory increased to 179.3 million barrels, up 31.2% year-on-year.
Distillate stocks have continued to rise, although refiners process more crude oil into gasoline than middle distillates. According to John Kemp, a Reuters columnist, the gasoline to distillate ratio rose from 1.4:1 to 1.7:1 in the same period last year.
Demand in the United States is weak, and middle distillates are also trying to find other markets. In the context of the economic downturn, the recovery of fuel demand is slower than expected, while aviation fuel consumption is still in an unstable state, which has pushed the global distillate inventory to a multi-year high, resulting in a disastrous low level of refining profit margins around the world, making it impossible for refineries to process the increased crude oil into fuel.
Margins on refining products other than aviation fuels are also declining, as refiners are reluctant to produce too much aviation fuel at such low demand, preferring to produce other distillates.
For example, Argus estimates that Singapore’s fuel oil refining margin plummeted to a record low this week as refiners sought to maximize fuel oil production rather than aviation fuel oil, resulting in increased supply.
From the Gulf coast of the United States to the Amsterdam Rotterdam Antwerp (ARA) trading center in Europe, stocks of distillates such as diesel and gasoline are abnormally high.
One of the strongest signs of a growing global surplus of distillates may be the growing interest of traders in renting oil tankers to store diesel, Tanker Owners and tanker tracking companies told Bloomberg this week. In northwest Europe, floating storage of diesel and jet fuel is on the rise, as the price of futures delivered later is higher than the price of the previous month, which usually means oversupply, so traders have a reason to pay for the hire of tankers and to make a profit when they sell their products later.
The futures premium in the diesel market is even higher than that in crude oil, suggesting that there may be more interest in floating storage of distillates than in crude oil, according to the estimates of the company. Weaker than expected signs of a recovery in demand have dampened distillate consumption and led to oversupply, which will continue to depress oil prices.