The after effects of Hurricane Harvey can still be felt at UK sites, with diesel prices at a wide premium to petrol. In the international markets, the premium has begun to shrink again now that US refineries have resumed normal operations, but growing underlying diesel demand is keeping distillate crack spreads stronger than gasoline as we enter the heating season.
Global economic growth of 3.5% this year, as projected by the IMF, is fuelling diesel demand, and an estimated 30m of middle distillate production lost to Harvey-related shutdowns in the US Gulf have exacerbated global distillate stock draws.
This matters because these stocks are the cushion against heating oil shortages during a cold winter.
The US north east is the world’s largest heating oil market, where distillate demand can surge by up to 400,000 b/d in the fourth and first quarters, compared with summer months. Middle distillate stocks in the US had started to fall below prior year levels before the hurricane struck, and they are now 23.3mn bl below this time last year.
In Germany, the second-largest heating oil market with seasonal swings of up to 200,000 b/d, households are well stocked with heating oil after two mild winters. But sellers are running down wholesale depots in the country to take advantage of the backwardation a premium of prompt prices to forward that has opened up since the hurricane. Distillate stocks in Europe have also fallen below last year’s level.
A longer cold spell in the US or Germany would require more intense destocking of gasoil. The gasoil backwardation, which has encouraged destocking, has shrunk again to a $3.25/t spread between month one and month two futures on Ice from $7.50/t in mid-October, indicating that more immediate shortfalls are easing. The past weeks’ unusual European gasoil exports to Latin America are tailing off again as US refiners are retaking their usual market share.
Still, 10 months of cuts to crude production, the lost refining output from Hurricane Harvey, and economic growth, have all conspired to make the market more vulnerable to a cold winter than last year.