17 November 2018, News Wires — Global oil markets are increasingly over-supplied with light distillates, such as gasoline, while there are not enough middle distillates, such as diesel, which has opened a big price differential between the two fuels.
To keep meeting healthy demand for mid-distillates, refiners are processing high volumes of crude and creating a glut of gasoline.
U.S. gasoline prices for delivery in June 2019 are trading just $7 per barrel above benchmark Brent futures for the same month, compared with a premium of $18 per barrel for low-sulfur distillate fuel oil.
Early in October, the gap in cracking margins was much narrower, with premiums of $14 and $17 per barrel over Brent respectively, but since then gasoline prices have slumped amid fears of over-supply.
Gasoline prices have been hit by a combination of record refinery processing in the third quarter and flattening consumption from U.S. motorists which have left the market carrying record stocks for the time of year.
Diesel prices, on the other hand, have been supported by strong demand from the freight, manufacturing and mining sectors as well as from oil and gas drillers themselves.
Distillate prices are also being supported by the prospect of even higher consumption from the start of 2020 when new pollution regulations on bunker fuels used in the shipping industry come into force.
Regulations adopted by the International Maritime Organization will require shipping firms to switch from using heavy fuel oil to middle distillates unless they install expensive scrubbers to clean up their sulfur emissions.
Differential growth in light and middle distillate consumption is not a new problem.
Gasoline and diesel consumption are driven by different factors which means that growth rates differ more often than they are the same.
Gasoline consumption is more weighted toward private motorists while distillate is geared toward commercial freight transport, aviation, manufacturing, farming, mining and oil, and gas production.
Gasoline is weighted regionally toward the United States and Japan while distillate is weighted more toward Europe, Latin America, Africa, Asia, and the Middle East.
As a result, gasoline use tends to be steadier across the business cycle while distillate consumption varies much more with the state of the economy.
In a typical expansion, gasoline consumption tends to dominate in the early stages while distillate growth takes over as the cycle becomes more mature.
If the expansion or contraction is synchronized globally, the impact on distillate demand becomes much more pronounced than if it is concentrated in only a few regions.
Late-cycle growth in distillate demand during 2017 and 2018 has left inventories relatively low while the introduction of new IMO regulations threatens to tighten them even further in 2019 and 2020.
Like any commodity market, even small imbalances between the production and consumption of individual fuels can have an outsized impact on prices.
But gasoline and distillate are co-products from the same refining process, so refiners have no option but to cope with the resulting large swings in margins.
Refiners have some flexibility to change the ratio in which they produce light and middle distillates by altering the slate of crudes they process and running their fluid catalytic cracking (FCC) units in max-distillate rather than max-gasoline mode but the flexibility is quite limited.
For the most part, the market for individual fuels is made to balance through changes in prices and consumer behavior.
Rising distillate prices will force the freight transportation sector to focus on improving fuel economy by trimming schedules, consolidating loads, switching from air freight to ocean shipping, and slow steaming.
Freight and logistics firms have considerable scope to cut fuel consumption by reducing part loads, minimizing empty backhauls and switching away from air freight, sacrificing delivery speed for improved fuel economy.
Shipping companies can also achieve large reductions in fuel consumption by making even a small reduction in sailing speed.
In a period of high fuel prices, shipping companies can trade increased sailing times, smaller schedules and larger fleets (higher capital costs) for reduced fuel consumption (lower operating costs).
The growing gap between diesel and gasoline prices will also accelerate the shift away from diesel toward gasoline for private motor cars and fleet vehicles especially in Europe.