Distillate Oil Market Update

Overview

The U.S. distillate and Asian / European distillate markets are showing somewhat divergent pictures of late.

The U.S. distillate market has been helped by drawdowns in 3 out of the past 4 weeks. The 3 times that draws were seen, the draw exceeded survey predictions. Distillate stocks are now still 21 % above the 5 year seasonal average, but that is an improvement from the +24% figure of 4 weeks ago. Distillate fuel product demand has averaged 3.6 million barrels a day over the past four weeks, down by 8.2% from the same period last year.

A Reuters' analyst wrote recently that he sees distillate supplies being at seasonal level by year end as U.S. refiners are processing 16% less crude oil than the 5 year average for this time. Refiners are seen restraining output in the next 2- 3 months. U.S. Refiners have reduced jet fuel and fuel oil production in favor of producing gasoline. Refiners last week produced 1.77 times as much gasoline as distillate fuel oil and jet fuel combined. This is one of the highest rates in the past 25 years, according to the Reuters' analyst.

In Asia, the Gasoil crack from cash Dubai remains weak. It was valued at $2.16 today in Singapore trading, up only slightly from the 32 month low seen last thursday of $2.10. The region remains weighed down by ample supplies from India and China. China has exported more of late, because their refinery runs remain high as they process the cheap crude oil purchased in the 2nd quarter. India has exported fuel due to weak domestic demand due to Covid lockdowns. Recently in Asia, Gasoil prices fell below those of gasoline for the first time in 2 years due to rising supply. (Platts)

An issue that has weighed not only on Asian gasoil, but also European Gasoil has been the blending of jet fuel supplies into gasoil , increasing the supply of Gasoil as Jet fuel stocks in the European region remain near a record high. But refiners in both regions are close to having maxed out gasoil-to-jet fuel yield. Northwest European diesel cargo margins fell to a 21-year low to Dated this week. (Argus Media)

Increasing oversupply and lack of inland storage in Northwest Europe was said recently to have prompted more Gasoil cargoes to end up on floating storage despite questionable economics. (Platts)

Technicals

Technically the ULSD price on the CME fell much further than we anticipated one month ago. At that time we pegged support at the 1.1655-75 area as the bottom of a range. The price fell 10 cents below that in early September, but has risen with the entire complex since. Despite positive momentum on the DC chart, staying above the 1.20 level looks like an unlikely possibility. Support looks good near 1.075.

The prospect of refinery runs staying below normal and the advent of winter demand globally should help steady ULSD prices.

Spot Gasoil futures on ICE look to be currently midway between support in the 3.17 area and resistance near 3.495.

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