Coronavirus may bug diesel may after gasoline, jet fuel price crash

The world over, one mainstream fuel -- diesel -- has managed to remain a decent profit center for the oil refining industry at large as the novel coronavirus ravages economies and their wider demand for petroleum products.

Diesel has risen in value relative to crude in recent weeks due to a combination of continued industrial usage and purchasing of a near-identical fuel for stockpiling as a heating oil in Europe. In addition, there have been curbs in refining to minimize a glut of products like gasoline and jet fuel.

But diesel’s star is starting to fade, with its premium to crude oil recently dropping in trading hubs around the world. As refiners try to maximize output of the fuel and with only a finite amount of land-based storage, it may be just a matter of time before the market starts to collapse.

“It feels like we’re running almost at full tilt into a brick wall,” said Steve Sawyer, director of refining at Facts Global Energy.

Diesel’s premium to crude in northwest Europe dropped to under $10 a barrel on Friday, after settling at a little over $17 -- the highest since October -- on March 30. The premium, or so-called crack spread, has also dropped dramatically in Singapore and on the U.S. Gulf Coast in recent days.

Until now, diesel has been somewhat shielded from the troubles plaguing jet fuel and gasoline, which have tumbled in value as airlines ground flights and governments impose restrictions on people’s movement. Because of the collapse of those markets, refiners have been focusing on diesel production instead, building up a potential problem for the future.

The extent of the possible oversupply is unclear. Diesel margins in Europe are likely to be hit first, Sawyer said, adding that the continent’s relatively high number of diesel-powered passenger vehicles makes the fuel there potentially vulnerable to coronavirus-related lockdowns that sap demand. Tankers hauling millions of barrels of unwanted product from Asia and Russia will further add to supplies.

America is also seeing waning demand. Pilot Company, the country’s biggest truck stop company, said diesel sales across its business were strong several weeks ago, when the World Health Organization declared the coronavirus a pandemic. Since then, diesel sales have dipped, this week down about 10-15% as industrial plants, other businesses and cities shut, according to Pilot Chief Executive Officer Jimmy Haslam.

Refineries across the globe have been curbing production as the outbreak spreads. If supply drops enough, then the risk of a diesel glut will subside.

One factor to watch will be the amount of fuel that moves into storage. In Europe’s Amsterdam-Rotterdam-Antwerp region, diesel and gasoil supplies in independent storage are near their lowest seasonal levels in six years, data from Insights Global show. Distillate inventories in the U.S. have also declined, according to government data.

“We don’t actually expect to see that much diesel end up in stock in the coming weeks,” said Eugene Lindell, senior consultant at JBC Energy GmbH in Vienna. “This is because it is the only product that is short, and therefore the only product that keeps refineries running. So if demand falls more, supply will have to fall more as well.”