Podcast - Driving Discussions: The impact of coronavirus on European fuel markets and refineries

Author Argus

Join Josefine Ahlström, VP, Business Development, Europe and Elliot Radley, Editor, Argus European Products as they explore the impact of coronavirus on European fuel market and refineries.

This podcast will focus on the short-to-medium-term supply/demand of gasoline, diesel, heating oil and jet.

 

Transcript

Josefine: Hello, and welcome to today's "Driving Discussion." We are in Europe today and looking at the impact on the European road fuels market from the COVID-19 virus. And my name is Josefine Ahlström, VP of Business Development Europe. And I have the company today of Elliot Radley, editor of Argus European Products Reports. Welcome, Elliot.

Elliot: Thanks, Josefine, good to be here.

Josefine: So, Elliot, before we go into the road fuels, do you wanna quickly just mention what's going on in the jet fuels market at the moment?

Elliot: Sure, yeah, it's worth a quick overview, because the jet fuel market is certainly on the front lines of this outbreak given the measures we've seen in place. The airlines have been hit massively hard. We've seen Ryanair reduce its capacity by around 80% and expects to have all its flights grounded in April and May. EasyJet has just taken the decision to ground its entire fleets with no certainty when flights will be resuming. So for jet fuel prices, that obviously has a major impact and the loss in demand is huge. We saw delivered cargo prices fall to just $226 a ton last week, which was their lowest in around 17 years since 2002. And that compares with average prices of more than $500 a ton in February. Margins have also been under pressure. They fell to less than $6.50 a barrel last week for the first time since May 2009. And that compares with almost $16 a barrel in March last year. So very heavy for the jet complex. Also worth mentioning is that jet fuel cargoes we're seeing priced at discounts to the ICE Gasoil contract, and that's for the first time since Argus began assessing them in this way back in 2006. So it depends how long these measures remain in place. But yeah, not a good picture for jets at the moment.

Josefine: Wow, that's quite astonishing to hear that, Elliot. But is there a different story to gasoline overall in the diesel market?

Elliot: Yeah, that's right. So, somewhat strangely, we've seen diesel margins moving in the opposite direction to jet. And given diesel's linked to economic activity, you might expect that diesel would also be under immense pressure at the moment, given the measures we're seeing rolled-out across Europe to fight the virus. But for the time being, at least, that hasn't been the case. And we, in fact, saw delivered French diesel cargo margins hit 4-month highs of around $20 a barrel to North Sea Dated towards the end of March, which is around twice that of where jet margins are currently. I think that can be explained by a few factors.

Firstly, as with jet outright prices of diesel have fallen massively given the sharp declines in crude values. French diesel cargo prices have more or less cut in half, with values around $300 a ton recently compared with closer to $600 a ton on average in January. That collapse in the outright price has incentivized buying in some sectors. And combined with the contango in the forward market. That's encouraging end users to place these volumes into storage tanks. The spread we saw between April and June ICE Gasoil was around $8 a ton at the end of March. So that's certainly a strong enough level to be driving these sorts of storage plays. In Germany, in particular, one of Europe's largest markets, of course, we've been seeing this. There's been strong buying for heating oil and diesel. And that's been widening in land premiums in Germany compared with the IRA market. And there's been some refinery turnarounds as well in Germany, particularly constricting supply in the south, helping to lend support to the complex.

On the demand side we've had reports of delivery companies in Germany stocking up with diesel as orders have picked up with people trapped at home during the outbreak. Heating oil demand has been particularly strong lately, which has narrowed heating oil prices in comparison to diesel barges. And we've also heard the demand from the agricultural sector is quite strong for diesel. So that's been supporting diesel relative to jet. I think lastly, it's important to note that Europe's refineries are more geared towards the production of gasoline. So Europe is shorter on diesel in general and the market is more dependent on imports. So that means that in the case of maintenance or outages, as we see across Europe currently, any supply tightness will be more acutely felt on diesel.

Josefine: So, do you think given that there is still a large number of European countries that could be more hit by the virus situation, and we may see more lockdowns. So what's your view on where the diesel outlook or the diesel market going forward?

Elliot: Yeah, I think as we see the virus peak across Europe and these further measures put in place. I think naturally we'll see demand start to taper off and the economies will slow down if they haven't already, and that has to affect diesel demand, I think. So it's likely that we'll see diesel's position as an outlier in the products portfolio come under threat soon and I imagine margins will start to ease.

Josefine: And yes, moving over to the other major road fuels. So gasoline, what on earth that has happened to gasoline and really, what are the driving forces behind such a major change that we see on the gasoline market?

Elliot: Yeah, that's right. So gasoline has felt the pain of the Coronavirus outbreak arguably more than any other product in the refined products portfolio more so than jet perhaps. We had prices falling to record lows of just under $131 a ton on the 23rd of March. And that was their lowest since 2009 when Argus began assessing Eurobob gasoline. For comparison that compares with prices of more than $550 a ton in January. So a massive decline there. Around halfway through March we saw gasoline prices fall below secondary feed-stock values as well, which demonstrates just how economical gasoline was to produce at the time. So both naphtha and low-sulfur VGO, both of which are used as feedstocks to make gasoline were more expensive than gasoline itself. On the margin side, gasoline has been massively hit. It fell to discounts of almost $7 a barrel to crude towards the end of March, which is pretty much unheard of, certainly for this time of year. So that means the production of gasoline was essentially a loss-making affair. And even jet, as we spoke about earlier in this crazy market that we're seeing has remained at a premium to crude. So it goes to show just how weak the gasoline complex has been.

I think the reason why gasoline has been hit so badly, is because Europe is more long than ever on gasoline with no one really driving recreationally. Very few people driving to work, of course, amid the outbreak. Gasoline isn't as dependent on industrial activity as we see with diesel and the arbitrageurs out of Europe haven't been particularly attractive for gasoline recently. So a lot of the production has stayed within the continent.

Josefine: And talking about the decent demand before, but what about the gasoline demand? Are you seeing any indications of how much the gasoline demand in Europe has fallen?

Elliot: We're hearing anecdotal indications on how demand has fallen across Europe. And I think good examples are recently we heard the Italian unions, and of course, Italy has been hit the hardest at the moment by this outbreak. The unions there were saying they were going to close all of Italy's petrol stations. I think a final decision has yet to be taken on this. But if that happens, of course, demand destruction there will be massive. In Germany, we've heard fuel stations are facing declines in demand of 30% to 50%. And in some regions up to as much as 70%. So of course, those are just a few examples, but that's the kind of landscape that gasoline is facing currently, and is likely to face over the coming months as these measures roll on.

Josefine: And given that we just came through the switch from winter-grade of gasoline to summer-grade, has that have an extra sort of impact in addition to the current situation of gasoline not being in favor at the moment?

Elliot: I think on the seasonal transition for gasoline, it has lend some support to the gasoline complex given that the stringent specs for summer grade mean the barrels are more expensive. On the 30th of March, which was the first full day of summer trading for Argus Eurobob barges, which, as you know, is the European gasoline benchmark. Gasoline did return to a premium to North Sea Dated for the first time since around mid-March. But it is worth mentioning that that was led more by a $3 fall in the value of dated on the day. So, it's not particularly that there's strength in the gasoline complex, I'd say, but the seasonal transition has helped somewhat.

Josefine: Thanks, Elliot. That's very useful. And then overall I mean, how are the refiners managing this difficult situation? Are they looking...I mean, going forward, I mean, we see extraordinary low crude prices. So yesterday, I mean, Argus assessed North Sea Dated just under $18 per barrel. So yesterday, Monday, the 30th of March. So we see the whole refined products complex coming down massively in values. And then we have the jet and the gasoline, as you mentioned, crashing. And then diesel being the only possibly current blessing for the European refiners. But are there some measures they're putting in place in order to sort of manage the situation going forward, in your view, Elliott?

Elliot: Sure, sure. I think refiners in Europe will be looking to manage the current situation in any way they can. But with margins, as you mentioned, for so many of those products under pressure, it's certainly a tough time. Looking to one crack spread of profitability roughly for a typical refinery, which assumes that for every three barrels of oil you run, you produce two gasoline and one of diesel. That marker against ICE Brent actually moved into negative territory in March, suggesting that these refiners might be running at a loss against data that has remained just above zero. But you can still see the pain that these refiners are going through. On average, we were talking about levels of $5 a barrel in March. And that compares with $8 a barrel in February, and an average of $10 a barrel across 2019. So it's certainly a tough time. We talked already briefly about the fact that spring maintenance has pretty much reached its peak. I think we've had around 15 refineries offline in recent weeks, with that number somewhere between 12 to 14 now, we think. That's pretty normal for this time of year, and I think a lot of refiners undertook heavy maintenance in the autumn period last year ahead of the IMO 2020 rollout. But that's certainly helping lend some support to the complex currently, whether we see those refiners choose to extend turnarounds that are currently happening. And given there's no real rush to be producing products like gasoline at a loss remains to be seen.

What could complicate this, though, is staffing at these refineries given the lockdown measures across Europe. Perhaps some turnarounds will still go ahead as planned. Some might be canceled, some might be postponed. We've already seen this, for example, in France with Total phase in and Grand Prix [SP] refineries, where maintenance has been suspended because of a lack of personnel, meaning the restarts of those facilities have been delayed. Gunvor has taken a similar decision recently with its Rotterdam refinery, which went offline back in November last year because it was uneconomical to run even back then. Neste in recent days said it would do short sharp bursts of business-critical maintenance rather than a long stoppage for a more broad turnaround, and presumably that's also because of a lack of access to personnel. I'm sure there could be others in the coming weeks as these measures get rolled out further. Outside of that, there are a lot of refiners across Europe that are offline for plan maintenance currently. And if they do choose to come back online in this environment, the need to reduce run rates across Europe will, of course, be higher than it currently is. We might see more drastic measures taken. We saw API Falconara in the Mediterranean that they recently decided to shut down the refinery there until late April as there's just not enough demand in the region and their storage tanks are full now. So we'll see if others follow suit. But how many refineries might need to consider taking these sorts of measures to balance this market as it currently stands is unclear.

If we're talking, as we were before, about demand destruction of 50% up to 70% in some regions, perhaps even more, you could argue that the same percentage of refinery capacity would need to close to balance that market. Currently, we see around 4 million barrels a day of refining capacity that has at least one unit down for maintenance or otherwise. And that's around a quarter of total European capacity. But much of that is plan maintenance, so it's likely to come back online shortly. Of course, some refiners won't choose to shut down completely, but will reduce run rates. And we've heard of cuts as much as 2 million barrels a day that could be taking place over the next few weeks. But even with those, there's certainly a long way to go before we reach a state of balance, I think.

Josefine: Thanks. Thanks, Eliot. And I'm on my final question. So are we seeing the battle between Saudi Arabia and Russia on crude production, and so for the European refiners, what is your last comment there in terms of the scenario going forward here?

Elliot: Sure. So the expectation, I think, over the next few months given the breakdown in talks between OPEC members is that there'll be a glut of heavier sour crudes hitting the market from Russia and Saudi Arabia in particular. For the lighter end of the barrel, that could be something of a life raft. Given that those crudes are less suitable to producing lighter products, so it may help tighten the fundamentals on gasoline, particularly as we're moving towards the summer season, which is typically driving season but I can't see many people driving in the current conditions so we won't see much pickup there. But conversely, to that, of course, the sheer volume route [SP] is what has pulled prices so low. So conversely, this could encourage refiners to stock up while they can on these volumes and run barrels while they have access to them, and that would only add to the current oversupply of products in Europe.

Josefine: Thank you, Elliot. That has been very, very useful. And that's all from us for today and thank you for listening. And if you would like to track the immediate fall-out from the Coronavirus on the commodity markets, just head over to our dedicated hub page on the Argus Media website, which you find basically at www.argusmedia.com/coronavirus. Thank you for listening and goodbye.

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