How Will a Diesel Glut Affect Refiners?

As the diesel glut in Europe intensifies, experts are warning refinery closures could be on the horizon in oil-producing nations such as France, Finland and the Netherlands. Despite the approach of winter in the Northern Hemisphere demand for diesel has failed to pick up. The jet fuel market has also been hit hard by coronavirus travel restrictions, resulting in a surplus of diesel. If the downward trend continues analysts say the profitability of European oil refineries could be severely compromised.

European refineries set to curb production

While closures in France, Finland and the Netherlands will take some of the pressure off, a surge in European COVID-19 cases and consistently weak diesel prices make a genuine recovery unlikely. A new report from IHS Markit predicts European refineries will operate at 25% below usual capacity in October. “We don’t see any scope for strong recovery in refinery utilisation through next spring,” says IHS Markit analyst Eleanor Budds. “Demand recovery will be hampered by restrictions on movement and very subdued jet demand.”

With European diesel currently priced at around US$4 a barrel more than crude, it’s difficult for producers to entice buyers and offload fuel. Gasoline markets are also being bolstered as motorists transition away from public transport and towards private vehicles in response to COVID-19. This has contributed further to flailing diesel demand and the growing supply glut.

Fears over COVID-19 surge

In response to the growing supply glut, European energy giant Royal Dutch Shell has confirmed it will be scaling back production at several of its plants. This corresponds with the latest predictions from the International Energy Agency (IEA), which expects refinery production to dip in October and start to recover in November. The IEA outlook is optimistic though some analysts warm a surge in coronavirus cases could bring the upward trend to a halt.

Europe isn’t the only region bracing for cuts, with American refineries also preparing to curb production in an effort to manage increasing diesel stockpiles. According to IHS Markit analyst Debnil Chowdhury, Gulf Coast refiners may have to trim output by around 60% to ease the glut.

OPEC+ in the spotlight

Experts are also keeping a close eye on OPEC+ supply, with Wood & Company analyst Jonathan Lamb predicting the easing of production cuts could offer some relief. Ongoing cuts heightened demand for high-sulphur fuel oil (HSFO), a by-product that many refineries produce. If OPEC+ supply increases it could loosen the HSFO market and force many smaller refineries to shut down.

“HSFO has been selling at high prices, thanks to a shortage of heavy crude oils, which probably kept a few more simple refineries in the game,” says Lamb. “Rising OPEC production should help solve that one.”

As well as a reduction in capacity, refineries are also being forced to address their environmental footprints. Find out more in ‘Digitalisation Transforms Refinery Emissions Monitoring and Combustion Control Gas Analysis.’