What is driving distillate prices northwards? The question has clear cut answer in line with the market fundamentals and macro economic realities. According to Bank of America Merrill Lynch (BofAML) high diesel prices trace their route to:
1.Increasing domestic demand in China
2.Strikes in France
3.Surge in Latin American demand
4.Increasing domestic and export demand in/on US
BofAML however rules out a repeat of 2008 crisis on various accounts explained at the end of this article. It is interesting that in EU, the demand is at a seasonal high despite the economic crisis looming large on the region.
Increasing domestic demand in China
Chinese black outs in the power sector are forcing companies to switch to diesel power generators, pushing up consumption and guess what; reducing exports to the rest of the Asia-Pacific region! To meet the energy intensity targets envisioned in Chinese five year plan, the government is on a rampage in power sector, enforcing cuts which would reduce reduction in energy intensity of 20% from 2006 to 2010.
In line with the fuel shortages and to rein in inflation, China s biggest oil refiner Sinopec has halted exports starting from Friday.
China is bringing down its heavy industrial activities and coal-fired electricity production. From 25% higher Y-o-Y just six months ago thermal power generation in China is now flat to last year s levels.
Thermal power generation is currently at a 14 month low. This in turn must have contributed to increased diesel demands with statistics supporting a 13.1% Y-O-Y rise in Chinese industrial production.
Increased Chinese demand for distillates would mean decreased exports to Europe by 130 thousand b/d over the coming months concludes BofAML.
Strikes in France
In addition to various supply side woes, French strikes significantly contributed to the high prices. The strike threw into hibernation, ten out of twelve refineries in France that accounted for 15% of total European refining capacity.
The coincidence of the strike falling in line with maintenance for the year in refineries aggravated the outcome.
Now the refineries there are trying to make up for the loss with Spain chipping in with 100 thousand b/d of output.
Surge in Latin American demand
Latin America is guzzling diesel. Unplanned outages coupled with excessive rain in Brazil damaging the sugar crops and thereby ethanol supply, diesel demand in Latin America surged with US having to push up the exports. 18 million barrels of diesel was exported in July alone.
Refineries in Venezuela, Mexico and Chile suffered from supply disruptions and unanticipated outages. These refineries tried to gain their ground, but imports from US however remained on top due to strong economic activity in the Americas.
Increasing domestic and export demand in/on US
Improved economic conditions in US are driving the demand for distillates at a y-o-y rate of growth of 16% on a 4-week moving average basis, says BofAML.
The French strike called for increased diesel outflow from US in the form of exports. Inventories there, as a result, are falling. Distillate stocks fell by 5 million bbl in last week alone!
The surge in demand from Latin America was an important factor in driving up prices.
Please take note that, IEA recently reworked their estimates on global oil demand growth for 2010 to 2.3 million b/d which is the strongest pace in five years.
Market outlook
Markets would normalise by February, hopes BofAML with tightening expected in the near term.
China would become a net importer of diesel through the end of 2010, which would be for the first time since 2008 with exports coming down significantly, by a third of normal levels. That figure is equivalent to imports level of last month.
In fact Unipec imported 70-80 thousand tons of diesel for late November delivery which is unprecedented in a time span of two years. Contrast this with the forecast of IEA that near-term Chinese diesel demand would increase further by an average of 70 thousand b/d.
The trend however would be checked with the 11th five year plan drawing to a close and the 12th five year plan getting underway. As soon as China makes up for the nearly 1% increase in energy consumption from the first half of year 2010, the coal plants for electricity would fire up cooling down demands for diesel.
Other estimates conclude that 2.0 million b/d of global refining capacity has been shut down, mainly in Americas, in the last two years with 0.6 million b/d of capacity shortage to be experienced in 2011 on same account. Stricter laws in Europe prevent similar shutdowns there despite facing overcapacity constraints. In fact Europe and North America is having excess refining capacity. The unions in France were successful in extracting a promise from Total that the latter would not close down a refinery at least for the next five years. Additionally there are more projects in the anvil in crude distillation and upgrading of refineries.
Still a rationalization in refining capacity is expected across Europe with inefficient players getting marooned. In the short term, Singapore inventories may also draw slightly.
1.Increasing domestic demand in China
2.Strikes in France
3.Surge in Latin American demand
4.Increasing domestic and export demand in/on US
BofAML however rules out a repeat of 2008 crisis on various accounts explained at the end of this article. It is interesting that in EU, the demand is at a seasonal high despite the economic crisis looming large on the region.
Increasing domestic demand in China
Chinese black outs in the power sector are forcing companies to switch to diesel power generators, pushing up consumption and guess what; reducing exports to the rest of the Asia-Pacific region! To meet the energy intensity targets envisioned in Chinese five year plan, the government is on a rampage in power sector, enforcing cuts which would reduce reduction in energy intensity of 20% from 2006 to 2010.
In line with the fuel shortages and to rein in inflation, China s biggest oil refiner Sinopec has halted exports starting from Friday.
China is bringing down its heavy industrial activities and coal-fired electricity production. From 25% higher Y-o-Y just six months ago thermal power generation in China is now flat to last year s levels.
Thermal power generation is currently at a 14 month low. This in turn must have contributed to increased diesel demands with statistics supporting a 13.1% Y-O-Y rise in Chinese industrial production.
Increased Chinese demand for distillates would mean decreased exports to Europe by 130 thousand b/d over the coming months concludes BofAML.
Strikes in France
In addition to various supply side woes, French strikes significantly contributed to the high prices. The strike threw into hibernation, ten out of twelve refineries in France that accounted for 15% of total European refining capacity.
The coincidence of the strike falling in line with maintenance for the year in refineries aggravated the outcome.
Now the refineries there are trying to make up for the loss with Spain chipping in with 100 thousand b/d of output.
Surge in Latin American demand
Latin America is guzzling diesel. Unplanned outages coupled with excessive rain in Brazil damaging the sugar crops and thereby ethanol supply, diesel demand in Latin America surged with US having to push up the exports. 18 million barrels of diesel was exported in July alone.
Refineries in Venezuela, Mexico and Chile suffered from supply disruptions and unanticipated outages. These refineries tried to gain their ground, but imports from US however remained on top due to strong economic activity in the Americas.
Increasing domestic and export demand in/on US
Improved economic conditions in US are driving the demand for distillates at a y-o-y rate of growth of 16% on a 4-week moving average basis, says BofAML.
The French strike called for increased diesel outflow from US in the form of exports. Inventories there, as a result, are falling. Distillate stocks fell by 5 million bbl in last week alone!
The surge in demand from Latin America was an important factor in driving up prices.
Please take note that, IEA recently reworked their estimates on global oil demand growth for 2010 to 2.3 million b/d which is the strongest pace in five years.
Market outlook
Markets would normalise by February, hopes BofAML with tightening expected in the near term.
China would become a net importer of diesel through the end of 2010, which would be for the first time since 2008 with exports coming down significantly, by a third of normal levels. That figure is equivalent to imports level of last month.
In fact Unipec imported 70-80 thousand tons of diesel for late November delivery which is unprecedented in a time span of two years. Contrast this with the forecast of IEA that near-term Chinese diesel demand would increase further by an average of 70 thousand b/d.
The trend however would be checked with the 11th five year plan drawing to a close and the 12th five year plan getting underway. As soon as China makes up for the nearly 1% increase in energy consumption from the first half of year 2010, the coal plants for electricity would fire up cooling down demands for diesel.
Other estimates conclude that 2.0 million b/d of global refining capacity has been shut down, mainly in Americas, in the last two years with 0.6 million b/d of capacity shortage to be experienced in 2011 on same account. Stricter laws in Europe prevent similar shutdowns there despite facing overcapacity constraints. In fact Europe and North America is having excess refining capacity. The unions in France were successful in extracting a promise from Total that the latter would not close down a refinery at least for the next five years. Additionally there are more projects in the anvil in crude distillation and upgrading of refineries.
Still a rationalization in refining capacity is expected across Europe with inefficient players getting marooned. In the short term, Singapore inventories may also draw slightly.
