London — Global refiners are making more money for producing middle distillates such as gas oil and diesel now excess inventories accumulated during the first wave of the coronavirus epidemic have largely been absorbed.
Despite the improvement, however, margins remain low in comparison with the last two decades, pressured by the continuing downturn in demand for jet fuel, which comes from a similar part of the refining process.
And margins are likely to remain depressed for several more months to keep capacity offline and restrict combined output of distillates and jet fuel, until travel restrictions are eased and international passenger aviation resumes.
Futures prices for U.S. diesel made from WTI and delivered between June and December this year indicate gross margins of $16-19 per barrel, up from $9-11 before the successful vaccine trials were announced.
Equivalent margins for gas oil made from Brent and delivered in Northwest Europe have improved to $7-9 per barrel, up from just $4-5 before the first vaccine announcements.
But the gross gas oil margin is still only in the ninth percentile for all trading days since the start of 2004, leaving refineries under considerable pressure.
While global diesel and to a lesser extent gasoline consumption have bounced back since the second quarter of last year, jet use is still down by several million barrels per day.
The result is several million barrels per day of surplus refining capacity around the world, concentrated in refineries with the largest yield of middle distillates, most of them in Europe and Asia.
In the medium term, jet consumption is likely to recover to pre-epidemic levels, re-absorbing much of the excess refinery capacity.
Larger, more modern and more efficient refineries will therefore ride out the slump and wait for the next cyclical upturn once passenger aviation resumes.
But some smaller, older and less efficient refineries, many of which were only marginally profitable through the cycle before the epidemic, may not be able to sustain losses in the meantime.
The pandemic is testing their resilience, winnowing out the weaker assets, and resulting in permanent closures, conversions to import terminals, or sales to operators willing to accept lower margins long term.
- By John Kemp, a Reuters market analyst. The views expressed are his own.(
(Editing by Mark Potter)