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European Gasoil Inventories Fall, but Relief Could be on the Way

By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia

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European Gasoil Inventories Fall, but Relief Could be on the Way
 
Harry Altham
Energy Analyst, EMEA & Asia
harry.altham@stonex.com

Rising demand forecasts from China are providing support to the oil complex this morning, despite the bearishness stemming from new COVID restrictions in Shanghai and Beijing, introduced after clusters of positive cases were discovered this week. China National Petroleum Corp sees demand growing by 1.6M bbd in the summer, which would bring domestic consumption to levels 5% higher than in the summer of 2021. Consequently, Brent’s front month contract is holding above $123, despite the considerable obstacles ahead for Chinese demand recovery. We believe China could only consume an extra 1.6M bbd of oil if the Government was to remove its zero-tolerance approach to COVID, due to the inefficacy of Chinese-made vaccines against Omicron (44% protection level, according to a Malaysian peer-reviewed study) and because the level of natural immunity in the domestic population is thought to be very low (in absolute terms). We see China as vulnerable to frequent ‘circuit-breaker’ events that could limit demand, which could see Asian oil product premiums fall relative to their European equivalents in the wake of recent strength. 

Gasoline and gasoil inventory fell in Europe’s ARA region last week, the latter of which is once again approaching eight-year lows as inventories fell by 271k bbl. The cost of filling up a standard family car with gasoline in the United Kingdom has topped £100 for the first time, raising fears among economists that aggregate demand across the British economy could soon be impacted by steep price levels. The fall in gasoil inventory follows an eight-week period of relative stability in stockpile levels, which have hovered close to 1.5M Mt throughout that period. ICE Gasoil’s July contract is trading above $1,300/Mt and is approaching record highs (above $1,327 in March, a record for the second contract month). We are also observing a steepening of the backwardation in the forward curve as global stocks become increasingly finite. Moreover, yesterday’s largest trade was a $9M option bet that September gasoil would rise above $1,500, in a sign that markets are increasingly concerned about European shortages. 

That said, we believe respite is on the way; 1.12M bbd of shipments of gasoil departed U.S. ports last week destined for Europe. This far outpaces the seasonal rise in demand across the European Union, which leads us to believe there could be some price relief on the way for European consumers. When looking at gasoil from a global balance sheet perspective, we are also expecting strong Russian exports in June at 913k bbd, which is similar to what it had been exporting before the war in Ukraine. This should allow further exports from the Middle East to Europe as these supplies are expected to go to South Asia and China, freeing up more Gulf diesel for European markets. 

 

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