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Though European diesel imports from the United States have grown, it has not helped inventories

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

Though European diesel imports from the United States have grown, it has not helped inventories
 
Harry Altham
Energy Analyst, EMEA & Asia

The oil complex continues to regain some of the ground lost on Friday, as President Biden tried to reassure markets that a recession wasn’t an inevitability in the next 18 months. He then went on to say that the federal gasoline tax was under review in an attempt to ease some of the pressure on consumers; it is our view that this will only serve to increase demand and further tighten inventories – leaving the United States in the same price predicament in which it currently finds itself. Higher refinery runs are among a number of barometers suggesting that China is finding success in its ‘test to reopen’ scheme; high-frequency data is showing increased economic activity and transport movements across the country. With just 118 cases per day last week, we believe China’s prospects for reopening look stronger than previously anticipated, which could see regional demand rise, and refinery utilisation grow above the 65% seen in May.  

the early optimism on europe's imports from the united states this month was in vain
We reported earlier this month that U.S. diesel exports to Europe were off to a strong start in June (at 160k bbd in first week of June), raising hopes that European gasoil inventory pressure could be in for some much-needed relief. As we enter the last ten days of June, it does appear diesel imports will have grown month-on-month (72k bbd versus 40k bbd in May) in spite of the slower volume of trade in the second half of this month. That said, the increased imports have failed to ease European balance sheet pressure. ARA region gasoil inventories are currently at their lowest levels since April 2014, having fallen by 345k bbl last week (to 1.06M bbl). The tightness is causing the ICE Gasoil fair value crack to widen to record levels; it reached an unprecedented high of $57.10/bbl on Monday (data goes back as far as 2011). Furthermore, the ICE Gasoil Dec/Dec spread reached a record high on Friday ($256.50/Mt), as the backwardation in the forward curve shows seemingly relentless strength. The managed money net long as a percentage of fund open interest in ICE Gasoil reached eight-month highs, in a clear sign that the tightness looks set to continue; even as front month prices closed $28.25/Mt lower on Friday. What fundamental data could support such a bullish outlook?

The Google Mobility Index is showing increased demand-side activity in the United Kingdom, Germany, and France (among others) across a six-week period, indicating demand strength as a critical factor in European inventory pressure. Though Europe’s summer driving season impact on global gasoline stocks is much less than in the United States (Europe including the U.K. consumes 2.1M bbd of gasoline versus around 8.9M bbd in the United States), the continent consumes around 1M bbd of kerosene and 4M bbd of gasoil products, meaning demand factors weigh more heavily on these markets relative to gasoline in Europe. On the supply side, the United States is mulling export quotas on oil products as inventories dwindle and demand from Latin America and Europe rockets, which could threaten European stocks. Furthermore, Russian diesel exports could halt in December 2022 (should the E.U. embargo be agreed) and global refinery spare capacity (minus China) is extremely low. 

Though we expect to see volatility in European equity markets as the ECB tries to bring European interest rates into line with the U.S., we do not expect this, plus at-the-pump inflation concerns, to carry over into oil product demand until after the summer. This is due to relatively strong household debt/equity ratios and the perception of ‘freedom’ from COVID restrictions that blighted some European nations last winter. As a result, we believe gasoil spreads (particularly nearer-dated spreads) will become more backwardated into the coming weeks; the June high of $48 is the resistance level to look out for over the coming weeks. 

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Source: BP Statistical Review
 
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