Higher distillate output likely in coming months

Demand for distillate fuel has received certain temporary support; however, stocks continue to be high, whereas output is expected to be higher in the months to come.  Unseasonably warm weather in Northern hemisphere because of El Niño events and a severe decline in industrial demand world-wide posed as solid headwinds for distillate demand in 2015 and in the beginning of this year.

Distillate consumption in the OECD nations in the last quarter of 2015 fell 180 kb/d, whereas it declined 610 kb/d y/y in the first quarter of 2016. Meanwhile, consumption in China fell 180 kb/d in Q1 2016. The El Niño effect on distillate reversed in the second quarter and supported prices. There was a slight stability in industrial activity, whereas demand was stimulated due to farm irrigation requirements and diesel use for power generation as drought affected areas in Asia and South America switched to hydropower as alternatives.

However, this factor is likely to wane in the months to come as monsoon season gets underway. Moreover, distillate stocks in several regions continue to be above normal levels in spite of the rebound in demand. This poses a threat to diesel cracks as refineries increase in the next two months.

Stocks of gasoline have also increased; however, risen demand from summer should be able to support cracks at these levels. Meanwhile, gasoline market has continued to witness robust demand growth as oil complex declined and benefited from warmer northern hemisphere weather. In Q4 2015, gasoline demand in the OCED continued to be strong, rising 170kb/d, while it rose 370kb/d in the first quarter of 2016. Solid demand pushed gasoline cracks above diesel in the winter months.

“Most positive factors for gasoline were already priced into gasoline cracks heading into summer, so upside likely remains limited, but we expect them to outperform diesel cracks over the near term,” said Barclays in a research report.