Picture: REUTERS
Picture: REUTERS

Houston — The global network of tankers, pipelines and refineries that makes useful fuels out of crude oil is built on long-standing patterns of consumption: so much petrol for the world’s drivers, a certain amount of diesel for trucks and a proportion of jet fuel for aviation.

The pandemic economy has turned that upside down, radically reshaping demand as various parts of the energy system recover at different speeds. Fear of the virus has persuaded millions of drivers to forgo mass transit and get in their cars. International travel is a vestige of a year ago and thousands of airliners lie mothballed.

Though crude prices remain in the doldrums, stuck near $40 a barrel for the past four months, a three-speed demand recovery is starting to show in obscure corners of the oil market.

India, ravaged by Asia’s worst Covid-19 outbreak, has begun to import petrol. In Europe, drivers are using almost as much fuel as before the pandemic even though economic activity remains depressed. In Asia, where the divergence has been strongest, petrol inventory has plunged in recent weeks. By contrast, the market for jet fuel, about 8% of the global market prepandemic, remains dire, with idle tankers floating fully laden holding unwanted cargo. Surplus fuel is being blended into diesel, causing knock-on oversupply.

Fully Back

Caught in the middle are oil refineries where billions of tonnes of crude get cooked into different products each year. In most parts of the world, they’re running well below capacity because consumers aren’t paying enough for jet or diesel. That’s constraining their ability to make enough petrol. In Europe, fuel demand from drivers was “now almost at the level where it was a year ago”, said Patrick Pouyanne, CEO of Total, Europe’s biggest refining company. “We still face low oil prices and refining margins are absolutely terrible.” Refiners have some scope to tweak how much crude they turn into each of the main refined petroleum products.

But that’s not solving the problem. As jet-fuel demand crashed, refining engineers responded by diverting as much jet-fuel as possible into the production of diesel. The thought was that demand for diesel, used in freight, construction and public transport, was more resilient than petrol.

Public Transport

Instead, as people shunned trains and buses in favour of their own cars, diesel’s demand recovered slower petrol’s. With diesel output booming due to the injection of jet-fuel, the result has been an enormous glut.

“A uniform recovery in oil products markets will be elusive until a vaccine is widely distributed,” said Amrita Sen, co-founder of consultant Energy Aspects. “Jet fuel demand is comatose.” India, the world’s third-biggest oil consumer, is emblematic of global refining troubles. In September, Indian petrol demand posted an annual increase, 2.1% higher than in the previous September as city dwellers used their own cars to go to work. At the same time, diesel demand was down 7.3% and jet-fuel demand fell more than 52%.

That left refiners facing the daunting task of meeting conflicting consumption trends. One state refiner responded by importing petrol as it wouldn’t be profitable to run its diesel units now.

Different Patterns

The patterns have been slightly different in the world’s largest oil markets: the US and China. Because Americans are less likely to rely on public transport than people in other parts of the world, Covid-19 has meant less driving as businesses shed jobs or shifted into remote working. Many US children are  not attending schools, further stifling consumption. Americans drove 14.9-billion interstate miles (about 24-billion kilometres) in the last week of September, about a billion fewer than in the corresponding period a year ago, according to the transport department.

But reduced refinery operations since the onset helped keep stockpiles of petrol only slightly higher than normal for this time of year. US refiners are drowning in a glut of diesel though — not so much because demand is lacking, trucking has boomed as the economy moves online — but because jet-fuel is swelling the whole pot of middle distillates. Demand for the fuel is stuck at about 50% of the five-year average for this time of year. Stockpiles are close to the highest they’ve been this time of year in Energy Information Administration data going back 29 years.

The distillate glut crushed margins and forced major refineries to shut units that make the fuel. The crack spread, which measures the difference between a barrel of diesel over one of West Texas Intermediate has been under severe pressure. The spread was trading at about $8.50 a barrel on Friday, down from over $25 a barrel a year ago.

In China, the major economy that’s recovered fastest from the pandemic, fuel demand was first to rebound post-Covid-19. Petrol consumption is running ahead of previrus levels as commuters shun subway networks.

While domestic flying has recovered markedly, international travel is still a trickle. Diesel is stuck in the middle, prompting some unusual prices in Singapore, Asia’s oil-trading hub. Benchmark petrol there was at a $3.26 a barrel premium to diesel on September 28, the highest since at least 2017, Bloomberg data shows. Back in March, the motor fuel stood at a discount of $25. The premium was 20c on Wednesday. Oversupply of jet-fuel, normally among the most expensive oil products, has pushed prices so low that it is even being blended with the much cheaper shipping fuel.

All Cargoes Europe

Europe’s refineries are grappling with the same dynamic, forcing the diesel crack spread to crude to plunge to as little as $2 a barrel in recent weeks.

On paper, the region should have one advantage. It has long made too much petrol and not enough diesel.

Europeans consumed more than double the quantity of diesel last year than they did petrol, according to BP figures. Because the region’s refineries make more petrol than is consumed, surpluses get shipped on tankers to New York and other cities on the US East Coast.

By contrast, the continent doesn’t churn out enough diesel and so is normally a magnet for suppliers from all over the world. Europe imports oil products — usually diesel and jet-fuel — from regions including Asia, the Middle East, Russia and the US. Flows have slowed since the height of the summer, but they certainly haven’t stopped. By late September, more than 20 fuel-carrying tankers had arrived from the Persian Gulf alone. More are en route, including from India and East Asia.

Demand for diesel also remains relatively weak compared with that for petrol, according to two European traders of petroleum products.

About 3% of crude processed in a refinery can be switched from production of paraffin — more or less the same as aviation fuel — to making diesel, according to Oil Analytics, a company that tracks refining margins globally. That’s about double what can be pushed into making petrol.

Refineries have been able to cope with the three-speed recovery to an extent by cutting how much oil they process, giving them more flexibility in what they churn out.

“The changes in product demand have been such that all the additional flexibility offered by the lower run rates has been exploited to the max,” said Jan-Jaap Verschoor, an analyst at Oil Analytics. “There’s only a little bit of flexibility left in the system.”


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