Global diesel fundamentals remain tight
Global diesel supplies remain tight, with new sanctions from the UK, EU, and US adding upward pressure on margins, keeping Gasoil–Brent (GOBT) crack spreads holding around $30/bbl, according to a recent Macquarie Group report.
Persistent risks to Russian diesel exports, both from sanctions and Ukrainian drone strikes, continue to embed a risk premium in the market.
Macquarie strategists note that markets are still digesting the potential impact of newly announced sanctions, with consensus forming that circumvention is more challenging for products vs crude. The magnitude of disruption depends partly on possible waivers or general licenses affecting European joint ventures—particularly those in Germany and the UK.
At the same time, Ukrainian drone strikes have kept the market on edge. While Russia’s refinery exports have recovered from September lows, the attacks underscore the fragility of its refining capacity. Impacted capacity has been returning faster than anticipated but the risk of more frequent and/or more intense strikes remains, the analysts noted.
Possible reduction in Chinese exports further supports diesel cracks. China’s refinery runs could fall by 150,000–300,000 b/d amid tight feedstock availability, due to import quota limits for independent refiners (teapots), and port sanctions restricting crude supply to refineries.
In addition, China’s commercial diesel inventories are estimated to be 20% below the 5-year average, prompting some refiners to rebuild stocks to safeguard energy security as winter demand peaks. Any pullback in Chinese exports could further tighten the global diesel balance.
Outside of China, the world remains short on buffer barrels. Low inventories heading into the Northern Hemisphere winter leave little room for demand surprises or unplanned outages.
According to Macquarie, recent refinery issues in the Middle East and Southeast Asia highlight how even minor disruptions can reverberate across product markets. With thin margins for error, cracks are likely to stay supported in the near term.
A gradual rebalancing
Still, there are growing indications that the diesel market may be approaching a turning point, according to Vikas Dwivedi, energy strategist, Macquarie Group.
Increased OPEC output and greater availability of heavy feedstocks result in higher conversion unit utilization, particularly in the US. By mid-September, US heavy feedstock imports had climbed roughly 350,000 b/d from early July levels. And the US diesel yield exceeded year ago levels in mid-August.
Meantime, in Europe, clarity around the EU’s 18th sanctions package is also helping stabilize sentiment. The ‘mass balance’ accounting system at the crude distillation unit (CDU) or refinery level helps alleviate concerns about the EU’s upcoming ban on imports of products refined from Russian crude.